KEY POINTS: PHARMA STOCK BUYS

  • Merck and AstraZeneca have strong product portfolios and pipelines.
  • Expect annual earnings growth of high-single-digit to low-double-digit for both.
  • These two stocks provide investors with market-topping dividends at favorable prices.

Investing in high-quality businesses within fast-growing sectors is the closest an investor can get to guaranteed long-term wealth creation. Pharmaceutical stocks have so far proven one of those sectors with accelerated growth. Moreover, it’s a good bet that future generations will take more medications than today, given the growing and aging global population.

As a result, it’s projected that worldwide pharmaceutical company investment will grow at an annual rate of 4.7%, from $1.3 trillion in 2020 to $1.6 trillion by 2025. Moreover, these two pharma stocks have robust existing drug pipelines and portfolios to cash in on the unstoppable trend of growing global pharmaceutical spending.

Read about pharma stock AbbVie, one of our 5 Stocks for Extra Income.

AstraZeneca

The first pharma stock to look at right now is British-based AstraZeneca (NASDAQ:AZN). It’s the world’s seventh-largest pharmaceutical company, with a market value of $199 billion.

Despite its immense size and scope, analysts anticipate AstraZeneca will post 15.7% annual earnings growth over the next five years. So what is the basis of this bright future forecast?

Blockbuster offerings

AstraZeneca’s current product offering includes 12 blockbusters and its blockbuster COVID-19 vaccine. Outside of COVID-19, the company’s “other medicines” category was the only one that failed to show revenue growth in 2021, with income decreasing by 8%. However, revenue increased by 8% (rare diseases) to 20% (oncology) in all other disease areas.

Based on AstraZeneca’s blockbuster medicines, revenue will continue expanding in the near future. And with 177 projects at various stages of clinical development, the company’s future drug launches should boost revenue and earnings significantly over time. 

Exciting growth prospects

AstraZeneca’s forward P/E ratio of 16.7 is considerably higher than the industry average of 11.4. However, its yearly earnings growth prospects are more than double the industry average of 7.5%. That explains why AstraZeneca and its 2.3% dividend yield rank as a top dividend stock.

Merck

Another pharma stock to look into buying is Merck (NYSE:MRK), based in the United States. It narrowly surpasses AstraZeneca, with a market capitalization of $200 billion, as the sixth-largest pharmaceutical company globally.

Concentrated portfolio

Merck’s present drug and vaccine portfolio is more concentrated than AstraZeneca’s. The firm has five rapidly growing blockbuster medicines, including the cancer treatment Keytruda and the human papillomavirus (HPV) vaccine Gardasil/Gardasil 9.

In 2021, Merck’s net revenue rose 17.3 percent to $48.7 billion.   That increase in revenue is due to double-digit revenue growth in the company’s animal health business (which provides veterinary medicines and services). That boosted Merck’s non-GAAP (adjusted) diluted EPS by 32.9% year-over-year to $6.02 in 2021.

Ongoing prospects

Analysts are upbeat about the pharma stock’s prospects. According to analysts, the firm will grow earnings at 9.4% per year for the next five years.

Merck believes that its HPV vaccine sales will double to $10 billion by 2030.  This growth potential is owing to the poor global HPV vaccination rates and strong demand. The firm also has a pipeline of 75 phase-two research projects and 28 phase-three studies in various fast-growing therapeutic areas such as oncology and vaccines.

Healthy pipeline

Merck’s healthy pipeline gives a reason to be optimistic.  The firm should be able to overcome the 2028 patent expiration of  Keytruda in the United States and Europe. Moreover, with a dividend payout ratio of just 43% in 2021, Merck still has enough cash to make critical acquisitions.  For example,  the $11.5 billion acquisition of Acceleron Pharma, finalized last November.

Future potential

Investors seeking a mix of value, income, and growth can get this pharma stock’s market-leading 3.5% dividend yield at a forward P/E ratio of 11, lower than the industry average of 11.4. That’s a great price in comparison to the industry average earnings growth potential of 7.5% per year over the next five years.  Especially given that Merck’s profits are growing faster than average.

Looking for great stock ideas? Read about Pfizer and two other great ideas at Buy These 3 Cheap Stocks in March.

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