2 best biotech stocks to buy in September
As Washington again seeks ways to negotiate lower prescription drug prices, the SPDR Fund for Selected Sector for Health Care (NYSEMKT: XLV) is lagging behind S&P 500 since the start of the year, up 17% this year against 21% for the index.
Two of the top 10 holdings of the Health Care SPDR fund are Merck (NYSE: MRK) and Pfizer (NYSE: PFE). Let’s take a look at why these two stocks offer both valuable returns and safe dividends, and why income investors should consider buying them in September.
As one of the world’s leading oncology companies, Merck is pulling full steam ahead and securing additional regulatory approvals around the world for its successful oncology drug Keytruda. However, the market arguably sees this as a double-edged sword; Merck shares are down 5% year-to-date as the S&P 500 has steadily climbed.
Indeed, despite the company’s success in securing approval for a number of additional indications for Keytruda this year, the drug’s patents will expire in the US and EU in 2028. Since Keytruda has contributed 8 .08 billion dollars, or 36.7%, of the 22.03 billion dollars of Merck. of first-half sales (vs. 34% of $ 19.64 billion in total sales in the first half of last year), the market is skeptical that Merck can adequately prepare for the imminent decline.
But I think the market doesn’t understand that Merck is more than Keytruda.
Merck’s vaccines and animal health segments increased first-half revenue by 18.4% from $ 5.73 billion last year ($ 3.42 billion in vaccine revenue and $ 2.31 billion in animal health revenue) to $ 6.79 billion this year ($ 3.90 billion in vaccine revenue and $ 2.89). billion dollars in animal health revenues).
With four of Merck’s pipeline vaccines in Phase 2 clinical trials and one currently under regulatory review, Merck is expected to be able to maintain momentum in its vaccine segment throughout this decade. This should allow Merck to remain a key player in the growing vaccine market, which market research firm Reports and Data says will grow 7.3% annually from $ 42 billion in 2020. to nearly $ 74 billion in revenue by 2028.
And while investors wait for the vaccines and animal health segments to soften the shock of Keytruda’s patent expires in 2028, they can collect a safe 3.5% return.
How can I be sure that Merck dividends are safe?
On the one hand, Merck’s dividend payout ratio for this year is expected to be very sustainable. It is expected to hover in the upper 40% range based on the current forecast of $ 5.47 to $ 5.57 in earnings per share (EPS) against dividends per share of just $ 2.60.
Second, Merck’s interest coverage ratio of 12 in the first half of this year ($ 4.70 billion in earnings before interest and taxes vs. $ 381 million in net interest expense) suggests the company could bear. a significant drop in its EBIT while covering the costs of its debt.
Despite Merck’s stable operating fundamentals, the company’s price appears to be fair to long-term investors. Merck’s current price-to-sell ratio of 3.83 is basically in line with its 13-year median of 3.82, making the stock a good buy for dividend seekers.
Pfizer has essentially matched the 21% gains of the S&P 500 since the start of the year. This is largely due to the unprecedented commercial success of its COVID-19 vaccine, known as Comirnaty, which was co-developed with Germany BioNTech (NASDAQ: BNTX) and fully approved by the United States Food and Drug Administration (FDA) for ages 16 and over last month.
Pfizer expects to deliver 2.1 billion doses of Comirnaty this year, which is expected to generate $ 33.5 billion in revenue after splitting its revenue with BioNTech. These revenue forecasts are up significantly from the first quarter of this year, when Pfizer forecast 1.6 billion doses delivered and $ 26 billion in net revenue.
While Comirnaty will be responsible for most of Pfizer’s revenue growth this year – from $ 41.9 billion last year to the $ 78-80 billion forecast for 2021 – Pfizer has other products that are expected to help. to future growth. Two drugs that have done so since the start of the year are Vyndaqel and Vyndamax, both approved by the FDA to treat a rare and serious heart disease known as transthyretin amyloid cardiomyopathy (ATTR-CM). Because more doctors and patients have learned about this treatment in the past year, the combined revenue of the two drugs in the first half of the year nearly doubled from $ 508 million last year to $ 953 million this year. year.
Over the next few years, a non-COVID vaccine that could potentially be a blockbuster for Pfizer as early as 2023 or 2024 is its respiratory syncytial virus (RSV) vaccine candidate, known as RSVpreF. If RSVpreF is able to replicate its Phase 2 clinical results in its ongoing Phase 3 clinical trial, the drug could bring Pfizer more than $ 2 billion in annual revenue.
Not only does Pfizer have a healthy product portfolio and pipeline, the company’s track record remains a strength as well. That’s because Pfizer’s interest coverage ratio in the first half of this year was 19 ($ 12.29 billion in EBIT vs. $ 639 million in net interest expense). In other words, even a sharp drop in Pfizer’s EBIT would not likely jeopardize the company’s ability to service its debt.
Pfizer’s adjusted EPS payout ratio will be in the high end of 30% this year based on its current guidance of $ 3.95 to $ 4.05 in adjusted EPS and the dividend requirement per share of $ 1.56. This indicates that the current dividend yield of 3.4% is safe and that the payout is expected to increase in the coming years as well.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.