Last week was a huge one for the pharmaceutical industry as Big Pharma earnings flooded in. Companies reporting quarterly results included industry heavyweights Pfizer (NYSE: PFE) and Merck (NYSE: MRK).
On the whole, earnings reports out of Big Pharma have been fairly good this earnings season. Companies have mostly beaten expectations, particularly on earnings, due to their ability to significantly cut costs.
Now that Big Pharma has concluded this round of quarterly earnings, here are some of the top performers, plus my pick for the best stock in the group.
Pfizer Delivers Solid Results
Pfizer was a notable standout in a broadly strong earnings season. The company beat Wall Street forecasts on both revenue and earnings last quarter and raised its full-year guidance, which is a rarity in corporate America right now. Many big multinational companies are struggling to grow due to the strong U.S. dollar and weakening economic growth in the emerging markets.
Pfizer earned an adjusted $0.67 per share on $13 billion of revenue last quarter, well ahead of the $0.55 per share in earnings and $12 billion of revenue analysts had projected.
On a year-over-year basis, Pfizer’s revenue jumped 20%, thanks largely to sales of new cancer treatments as well as its acquisition of Hospira.
Pfizer also boosted its full-year outlook. The company now expects full-year revenue to grow to $51 billion to $53 billion, up from $49 billion to $51 billion, and earnings are expected to be between $2.38 and $2.48 per share, up from previous guidance of $2.20 to 2.30 per share.
Merck Beats Estimates
Meanwhile, Merck also beat earnings expectations. Adjusted quarterly profit clocked in at $0.89 per share, beating average analyst estimates of $0.85 per share. However, Merck’s revenue fell 1% last quarter to $9.3 billion, while analysts expected Merck to deliver a 1% revenue increase.
Sales fell short of projections because Merck is seeing continued weakness in some of its older legacy drugs like Remicade. It’s banking on newer drugs like Keytruda and its hepatitis C treatment Zepatier to boost sales going forward, although this will take some time.
Big Pharma Earnings: Stock Pick
Big Pharma did a good job overall of beating expectations last quarter. One notable exception to this was biotech giant Gilead Sciences (NASDAQ: GILD), which reported a disappointing quarter. And yet, Gilead is my top Big Pharma stock pick, because it’s absurdly cheap.
Gilead stock trades for just seven times trailing earnings per share and six times forward EPS estimates. The reason is because investors are worried that the high growth rates seen in recent years will not last.
Indeed, the high growth seen in 2015 and in prior years was due largely to the huge success of its Hepatitis drugs Harvoni and Sovaldi. There is a concern because these two drugs, which collectively generated $4.2 billion of sales in the first quarter, now represent approximately 55% of Gilead’s total revenue.
It is true that growth in these two product categories is beginning to slow down, as competition has heated up from rivals like Merck. Gilead’s worldwide sales of Harvoni declined 15% last quarter, compared to the year-earlier quarter. This is particular concern because Harvoni itself is a $3 billion drug by revenue each quarter.
Because of this, Gilead’s total sales were $7.8 billion in the first quarter, up 2% from the same quarter last year. The company still achieved growth, but at a far slower rate than in previous periods.
Furthermore, sales could even begin to decline. Gilead management forecasts $30 billion to $31 billion in total sales this year, which would represent a decline from last year’s $32.2 billion in total sales.
Why Gilead Won’t Stay This Cheap for Long
Gilead’s growth is slowing, but at six times next year’s expected EPS, the stock is being priced for disaster. This overwhelming pessimism seems overblown.
Plus, the slowdown in Gilead’s revenue growth could easily be corrected through mergers and acquisitions, given the huge amount of cash on hand. Gilead ended the first quarter with $21 billion in cash, equivalents, and marketable securities on its balance sheet, compared with just $10 billion in current liabilities. It could easily make a significant acquisition or several, which can replenish its future pipeline and add to revenue and earnings growth going forward.
Gilead is still a strong cash-flow generator, and it uses this cash to reward shareholders with an attractive dividend. The company raised its dividend by 9% earlier this year; the current dividend yield is 2.25%, which is higher than the S&P 500 average yield.
Gilead is far too cheap, but if the company can reignite growth either organically or through a big acquisition, it might not stay this cheap for long.
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