Much like Big Tech companies ride the AI hype, pharma stocks are counting on valuation boosts from big drug hits and FDA approvals. This anticipation, however, brings to light the importance of discerning which pharma stocks to sell, as not all will sustain their high-growth promises, potentially generating double-digit profits in the short term.
This perspective often invites speculation that leads to overvaluation. Over the last three months, the SPDR S&P Pharmaceuticals ETF (NYSEARCA:XPH) is up nearly 22% compared to the S&P 500 (SPX) at 11.8%. This itself is indicative, given that the S&P 500 hit an all-time high thirteen times this year.
Which pharma stocks to sell during this market boom cycle?
Eli Lilly (LLY)
Eli Lilly’s (NASDAQ:LLY) revenue owes its boost to obesity/diabetes drugs Mounjaro and Zepbound. Compared to a year-ago quarter, the company’s Q4 ‘23 yielded a 28% revenue increase to $9.35 billion. Over one year, Eli Lilly’s stock gained 135% value based on the company’s successful rollout of obesity-related conditions alongside Verzenio, Taltz, and Jardiance.
Taking into account that 41.9% of the US population is obese, investors speculate that Eli Lilly’s growth will continue unimpeded. However, drug revenues tend to decrease over time, as evidenced by Lilly’s Humalog (-33%) and Trulicity (-14%). Moreover, in the age of social media, drug side effects tend to spread like wildfire, creating a dampening effect on demand.
On average, the Food and Drug Administration (FDA) has recalled 1,279 drugs annually since 2012, making pharma stocks a risky endeavor for both consumers and investors. During 2023, Eli Lilly’s price-to-earnings ratio was 121.76. The company’s P/E growth rate is forecasted to wind down to 45.81 by 2025.
While the company’s revenue has been successful in 2023 at $34.1 billion, even the 2024 guidance of up to $41.6 billion revenue doesn’t justify such high investor focus. This makes Eli Lilly one of the top pharma stocks to sell.
Amgen (AMGN)
Amgen (NASDAQ:AMGN) focuses on conditions that are more serious and with a limited number of treatment options. As such, the demand pool for Amgen therapeutics is inherently lower. In Q4 ‘23, the company reported 20% revenue growth to $8.2 billion, while yielding 7% growth of $28.2 billion for the full year.
Of 24 drugs in circulation, Amgen reported YoY revenue decreases on eight of them. The most successful Amgen drugs were BLINCYTO (leukemia), EVENITY (osteoporosis), and AMGEVITA for rheumatoid arthritis. Combined, they accounted for $2.6 billion worth of sales for the full year 2023.
Amgen’s strength relies on Prolia (osteoporosis) and Enbrel (rheumatoid arthritis), accounting for $7.7 billion in sales. While both conditions require the recurrent need for treatment, they are in the low percentage figures and non-drugs such as vitamin D aid in their prevention.
Moreover, Amgen reported a decreased operating margin by 9.3 percentage points for FY23 to 29.3%, while having decreased free cash flow of $7.4 billion compared to $8.8 billion in FY22. While this is still a large cushion, Amgen’s valuation is likely to continue to slide from one year’s ATH of $325 in February.
This may shift if Amgen’s weight-loss drug MariTide successfully exits the Phase 2 trial by the end of the year. Yet even then, Amgen would join already stiff competition among pharma stocks.
BioNTech SE (BNTX)
BioNTech (NASDAQ:BNTX) was virtually unknown to the public until it partnered with Pfizer for the C-19 vaccine rollouts. Up until 2020, the company had no operating revenue. Now sharing the same fate with Pfizer, BioTech stock is down -30% over one year.
Lacking recurring revenue streams from more generic drugs, BioNTech reported $1.27 billion operating income in Q4 ‘23 compared to the year-ago quarter of $2.2 billion. The drastic decline in profits reflected in BioNTech’s earnings per share.
With a forecasted P/E growth rate of negative 109.86 for 2024, BNTX is making a strong case for investors to cut their losses among pharma stocks to sell, ahead of the next earnings report in March.
On the date of publication, Shane Neagle did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.