The pharmaceutical sector has been on a roller coaster ride over the last several years. As recently as 2016, the industry was getting pinched by the double whammy of pressure to reduce drug costs and a corporate tax structure that was choking off topline growth. In the last year, many of the pharmaceutical companies have seen their stocks go through the roof as a result of the new tax policy. But not every pharmaceutical stock is showing strength.
Make no mistake, this is an industry that every investor – and every consumer – should want to see succeed. These companies are continuously introducing new drugs and treatments for cancer, Alzheimer’s, diabetes, and multiple sclerosis just to name a few. And that’s not to mention the drugs that help us manage our cholesterol, high blood pressure, and depression.
Not to mention, the baby boomer generation continues to reach retirement age. In 2018 alone, over three million people will be reaching retirement age and that pace isn’t expected to slow down significantly until 2029. As the number of retirees expands so too will their need for the products and services that come from this industry.
It’s expensive to develop these drugs, not to mention that it can take years for some of these products to reach the market. Our desire to want to believe in these treatments can allow investors to mistake an inflated valuation for a poor valuation.
But as an investor, we have to perform our due diligence, and there are some stocks that have qualitative or quantitative factors working against them. While the pharmaceutical is always changing, we’re providing a list of seven stocks that, for now, should stay out of your portfolio.
Quick Links
- Eli Lilly and Co.
- GW Pharma
- Gilead Sciences
- Alnylam Pharmaceuticals
- Bluebird Bio
- Adamas Pharmaceuticals
- Nektar Therapeutics
#1 - Eli Lilly and Co. (NYSE:LLY)
Eli Lilly and Co. (NYSE: LLY) - Eli Lilly is in that space where they have a lot of products in development – and many are showing enormous promise, but the stock has been struggling with declining revenues since a series of patents expired in 2011. One of their newer drugs, Solanezumab, an Alzheimer’s drug, failed to produce the expected results. However, the company is resting a lot of their hope on two of their newest cancer drugs Cyramza and Portrazza, which have been approved but are not yet at the point where they are generating tangible revenue for the company. The company also recently suffered a setback when a court ruled against their appeal of a $20 million patent lawsuit in which the company was accused of infringing on a German patent with its Cialis product.
From a technical standpoint, the stock has an earnings per share (EPS) of 2.27 which is down -37% for the year. This has brought their EPS forecast for next year to 3.87%. And the P/E multiple for the stock is around 43 which is above its multiple of 33 two years ago that was considered high at that time. However, the performance of the stock year-to-date is 30.01%. What seems to be of more concern for investors is that Eli Lilly seems to be accepting its underperformance instead of aggressively combating it.
About Eli Lilly and Company
Eli Lilly and Company discovers, develops, and markets human pharmaceuticals worldwide. The company offers Basaglar, Humalog, Humalog Mix 75/25, Humalog U-100, Humalog U-200, Humalog Mix 50/50, insulin lispro, insulin lispro protamine, insulin lispro mix 75/25, Humulin, Humulin 70/30, Humulin N, Humulin R, and Humulin U-500 for diabetes; Jardiance, Mounjaro, and Trulicity for type 2 diabetes; and Zepbound for obesity.
Read More - Current Price
- $777.00
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 17 Buy Ratings, 4 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $1,002.22 (29.0% Upside)
#2 - GW Pharma (NASDAQ:GWPH)
GW Pharma (NASDAQ: GWPH) - GW Pharma had a big moment this summer when it received historical approval for Epidiolex, a pharmaceutical that is the first of its kind to be derived from cannabis. But since then the company has failed to sustain the momentum that pushed its stock up to its all-time high shortly before the launch. The stock is up just 2% for the year and is lagging behind others in the sector. If this was a short-term problem it would be one thing. However, in the last three years, the stock has consistently lagged behind the performance of the S&P Biotech ETF which has returned approximately 35%.
One of the reasons for the stock’s lackluster performance is a case of irrational expectations. The stock rose rapidly from $9 to $111 after its initial public offering (IPO) which may have created expectations the stock could not sustain. Although Epidiolex received approval in a very short timeframe, some analysts suggest it could have been shorter, and more importantly, the drug is experiencing some headwinds regarding pending competition from Zogenix and a question of whether major insurance companies will get behind the new drug. GW Pharma is a stock with a lot of potential, but right now it may be wise to wait until the picture gets clearer.
About GW Pharmaceuticals
GW Pharmaceuticals plc, a biopharmaceutical company, focuses on discovering, developing, and commercializing novel therapeutics from its proprietary cannabinoid product platform in various disease areas. Its lead product is Epidiolex, an oral medicine for the treatment of seizures associated with Lennox-Gastaut syndrome, Dravet syndrome, or tuberous sclerosis complex.
Read More - Current Price
- $218.96
- Consensus Rating
- N/A
- Ratings Breakdown
- 0 Buy Ratings, 0 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- N/A
#3 - Gilead Sciences (NASDAQ:GILD)
Gilead Sciences (NASDAQ: GILD) - Gilead has had some big missteps in the past few years. For starters, they started seeing sales of their Hepatitis C products decline as far back as 2015. While some companies would respond to this by seeking out new sources of revenue, Gilead looked at what they perceived to be the high valuations across their industry and chose instead to take their pile of cash and put billions into a shareholder-rewards program. Things got worse when, at the beginning of 2018, new Hep C drugs came onto the market which has put further downward pressure on Gilead’s sales. In response to this, Gilead made what some analysts consider to be a curious acquisition of Kite Pharma which does not seem to provide them with competitive protection, nor will it provide them with an easy remedy for their declining top-line which is leading some analysts to question the opportunity cost. Kite Pharma specialized in adoptive-cell therapy which will be new to Gilead’s portfolio. This makes it hard to see Gilead becoming a leader in this space.
About Gilead Sciences
Gilead Sciences, Inc, a biopharmaceutical company, discovers, develops, and commercializes medicines in the areas of unmet medical need in the United States, Europe, and internationally. The company provides Biktarvy, Genvoya, Descovy, Odefsey, Truvada, Complera/ Eviplera, Stribild, Sunlencs, and Atripla products for the treatment of HIV/AIDS; Veklury, an injection for intravenous use, for the treatment of COVID-19; and Epclusa, Harvoni, Vemlidy, and Viread for the treatment of viral hepatitis.
Read More - Current Price
- $94.39
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 15 Buy Ratings, 12 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $96.43 (2.2% Upside)
#4 - Alnylam Pharmaceuticals (NASDAQ:ALNY)
Alnylam Pharmaceuticals (NASDAQ: ALNY) - The Cambridge, Massachusetts biotech firm specializes in creating techniques that can help block out the effects of harmful genes. Its initial application to showcase its techniques will be in the treatment of amyloidosis with a drug called Onpattro. If the company succeeds, they may become a very intriguing play, but right now the company is still working through a valuation problem. In 2017, the company’s $89.9 million revenue was largely the result of payments made from potential partners. However, Alynlam’s market value is $12.2 billion – that’s a pretty staggering 125 times revenue. The stock has risen from $42 in late 2016 to a 52-week high of around $123. The stock is down considerably from that point and is currently trading around $67. However, in their last earnings report, they showed an 87.9% decline in year-over-year revenue. Two reasons for this are value-based agreements (VBA) that make it less clear how much revenue their new drug will bring in. Particularly since it's impossible to predict how effective Onpattro may be. Further clouding the picture is that the FDA nixed the company's ability to market potential cardiac benefits of the drug which further clouds the picture of how Onpattro will fare against its competition.
About Alnylam Pharmaceuticals
Alnylam Pharmaceuticals, Inc, a biopharmaceutical company, focuses on discovering, developing, and commercializing novel therapeutics based on ribonucleic acid interference. Its marketed products include ONPATTRO (patisiran) for the treatment of the polyneuropathy of hereditary transthyretin-mediated amyloidosis in adults; AMVUTTRA for the treatment of hATTR amyloidosis with polyneuropathy in adults; GIVLAARI for the treatment of adults with acute hepatic porphyria; and OXLUMO for the treatment of primary hyperoxaluria type 1.
Read More - Current Price
- $235.90
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 18 Buy Ratings, 5 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $298.09 (26.4% Upside)
#5 - Bluebird Bio (NASDAQ:BLUE)
Bluebird Bio (NASDAQ: BLUE) - Another Cambridge, Massachusetts makes the list. Like Alnylam, Bluebird specializes in the area of gene therapy. In the case of Bluebird, they are focusing on applications for neurological disorders. The problem that investors are mulling over with Bluebird is the competitive landscape around its most promising drugs. In the pharmaceutical space, the window of exclusivity is very narrow and the space for Bluebird continues to be very crowded. Having said that, Bluebird also has valuation concerns. Their 2017 revenue was just under $40 million however its market value was $10.5 billion for a price/revenue ratio of 272. After the stock reached a record high of $236.17 in March of 2018, it has steadily retreated and is now selling around $119. The stock still has a market cap of $6.51 billion. If investors are looking for a positive sign, it's that Bluebird's pipeline is loaded. If only a few of these drugs take off, it could make the stock a buying opportunity. However, for now, the better play may be to let this one fly away.
About bluebird bio
bluebird bio, Inc, a biotechnology company, researches, develops, and commercializes gene therapies for severe genetic diseases. Its product candidates for severe genetic diseases include ZYNTEGLO (betibeglogene autotemcel) for the treatment of transfusion-dependent ß-thalassemia; lovotibeglogene autotemcel for the treatment of sickle cell disease (SCD); and SKYSONA (elivaldogene autotemcel) to treat cerebral adrenoleukodystrophy.
Read More - Current Price
- $8.48
- Consensus Rating
- Hold
- Ratings Breakdown
- 2 Buy Ratings, 6 Hold Ratings, 2 Sell Ratings.
- Consensus Price Target
- $49.14 (479.5% Upside)
#6 - Adamas Pharmaceuticals (NASDAQ:ADMS)
Adamas Pharmaceuticals (NASDAQ: ADMS) - Adamas has an approved Alzheimer’s drug in the market, Namenda, that has started to generate revenue for the company. In 2017, the drug’s revenue was less than $1 million. The drug is designed to treat Alzheimer’s related dementia. While analysts are estimating revenue from the drug could rise to $92 million in the next two years, it seems that investors were overly generous in their valuation of the company driving it up as high as $868 million. That’s a price/revenue ratio of 9 times estimates two years out. Investors though seem to be more concerned about their recently introduced Parkinson’s drug, Gocovri. They are questioning the commercial prospects for the drug which is entering a very competitive space with Osmolex. While there is a reason to believe Gocovri may prove to have a competitive advantage that will allow Adamas to be a big winner, there is a lot of uncertainty that seems to be manifesting itself in 2018. The stock has come back down to earth this year, falling from a high of $44 per share in early 2018 to its current price of right around $11.
About Adamas Pharmaceuticals
Adamas Pharmaceuticals, Inc engages in discovery and development of chrono-synchronous therapies for chronic neurologic disorders. Its products include GOCOVRI, ADS-5012, ADS-4101, and Namzaric. GOCOVRI is indicated for the treatment of dyskinesia in patients with Parkinson's disease receiving levodopa-based therapy.
Read More - Current Price
- $8.22
- Consensus Rating
- N/A
- Ratings Breakdown
- 0 Buy Ratings, 0 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- N/A
#7 - Nektar Therapeutics (NASDAQ:NKTR)
Nektar Therapeutics (NASDAQ: NKTR) - The company continues to struggle with its latest cancer drug, NKTR-214. The combination treatment helped the stock soar in early 2018 when Bristol-Myers Squibb agreed to license rights to NKTR-214. However, after reaching that height, investors have become less than enthused about the drug's potential. The response rate with declined for both melanoma patients and kidney cancer patients. Why is this important? If the numbers don’t improve, the stock may not receive FDA approval. What may be even more concerning is that the company withheld objective response rate (ORR) data for up to 69% of dosed patients. One of the primary rules of biotechnology is that a company does not withhold data unless it’s bad. The stock has fallen to around $37 per share from a lofty high of around $111. Until investors get more firm data over a series of reports, Nektar seems like one stock that should be avoided.
About Nektar Therapeutics
Nektar Therapeutics, a biopharmaceutical company, focuses on discovering and developing medicines in the field of immunotherapy in the United States and internationally. The company is developing rezpegaldesleukin, a cytokine Treg stimulant that is in phase 2 clinical trial for the treatment of systemic lupus erythematosus and ulcerative colitis, as well as phase 2b clinical trial to treat atopic dermatitis and psoriasis; and NKTR-255, an IL-15 receptor agonist, which is in phase 1 clinical trial to boost the immune system's natural ability to fight cancer.
Read More - Current Price
- $0.95
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 4 Buy Ratings, 2 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $4.10 (331.9% Upside)
Investing in pharmaceutical stocks is not for the faint of heart. In addition to understanding the technical data that underpins every stock, investors are charged with understanding the science behind the stock. This can be difficult because it’s hard to not want to believe in these stocks. Because beyond the hope they provide for diseases that many families have been affected by such as cancer, Alzheimer’s, and multiple sclerosis, can cause these stocks to attract investor money as they see a growing market for these drugs as the world’s population continues to age.
But it’s important for investors to take the emotion out of these stocks. Because the drugs still have a high failure rate. When they fail, the decline in a company’s stock price can be disastrous. Many of the stocks in this report are down more than 50% from record highs just recorded this year.
These seven pharma stocks may have better days ahead of them, but for now, investors may want to take a pass.
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