We recently published a list of Ten cheap pharmaceutical stocks to buy, according to short sellers. In this article, we take a look at how GSK plc (NYSE:GSK) compares to other cheap pharmaceutical stocks.
The pharmaceutical industry is one of the most interesting sectors to invest in. Although most industries can be broadly categorized as “vulnerable” or “resistant” to economic headwinds, pharmaceutical companies have the potential to operate in both categories. Companies that develop new drugs, especially those in the biotechnology industry, do not fare well in a tough economy because they find it difficult to raise capital and keep costs under control. At the same time, large pharmaceutical companies and those that develop and sell generic drugs can survive in a tough economy because demand for their products is relatively inelastic.
Like all other industries, the pharmaceutical industry has changed over the past few decades. This change has been driven by the rise of biotechnology and biopharmaceutical companies seeking to break new ground in drug development. Before we get to the data, some of the changes that have taken place include increased spending on acquisitions rather than just research, a global industry where multinational companies operate in multiple markets, and marketing campaigns aimed at extending product life cycles rather than maintaining competitive advantage through patents.
In terms of data, biotech has caught up with pharma in terms of revenue, accounting for 30% of total pharma revenue in 2014, compared to less than 1% in 1991. At the same time, biotech operating margins have also caught up, ranging from around 7% to 12% between 1991 and 1993, to negative over the next decade until 2024, and surpassing pharma margins of around 24% in 2014, standing at around 28%. This gap widens when we remove the impact of R&D, which disproportionately affects biotech companies, as in the five years between 2010 and 2014, pharma companies’ pre-R&D operating margins fell from 40% to around 28%, while the corresponding figure for biotech companies rose from 40% to around 56%.
During the same period, biotech’s growth to R&D ratio (which measures growth per R&D unit per unit of sales) was 0.95, more than ten times that of the pharma sector’s 0.08. This tremendous catch-up of biotech is also reflected in pharma valuations, as biotech companies accounted for around 40% of pharma valuations in 2014, a historic high. Measured by multiples, i.e. enterprise value relative to operating income before R&D, the biotech sector’s premium to that of the pharma sector has fallen significantly. It peaked at ~77x in 2000 and fell to ~18x in 2014, a significantly lower premium than the pharma sector’s premium of ~11x, which was 20x in 2000.
Building on this, although market-level valuations of pharmaceutical companies have shifted over the years due to the growth of biotechnology companies, this does not give us any details on what is driving company-level valuations. In this regard, a study using data from 101 companies over ten years shows that the top three drivers of pharmaceutical valuation are R&D, advertising, and manufacturing facilities. These three have regression-based valuation weights of 13.19, 15.85, and 19.13, respectively. This provides important insight as it suggests that R&D is far from the key competitive advantage in the industry as is commonly believed.
In fact, advertising and production are the main drivers of pharmaceutical company valuations if we consider the industry’s biggest thorn in its side, patents. In 2024, weight loss drugs have cemented their place in the market, and when their patents expire, the industry and the government could find themselves embroiled in even more thorny battles that could affect pharmaceutical company valuations. Industry critics accuse pharmaceutical companies of unsavory practices such as filing subsidiary patents that extend patent terms by filing patents for different features of the same product, filing differently worded but similar patents in so-called patent thickets, and intentionally delaying upgrades to take advantage of evergreening provisions.
While it may seem like this potential disruption to the pharmaceutical sector is still a long way off, the reality is different. GLP-1-based weight-loss drugs liraglutide, albiglutide and dulaglutide were first approved by the FDA in the 2010s, and companies in India and China have already begun producing low-cost biosimilars that could appeal to a broader market. Even in developed countries, things are moving quickly: Indian company Biocon has already secured approval for a generic version of liraglutide in the UK, and the FTC sent letters to 10 companies, including some of the largest weight-loss companies, in May as part of its fight against fake patents. Looking ahead, expect to see an increase in generics and an increase in patent litigation, as the weight-loss pie could be as big as $100 billion by 2030, according to one prominent investment bank.
Our methodology
For our list of the best pharmaceutical stocks to buy according to short sellers, we sorted specialty and general drug manufacturers with market caps over $300 million by the percentage of outstanding shares that were shorted and selected the stocks with the lowest percentage. Then we selected the stocks with a trailing P/E of less than 57.63 or a current P/E of less than 38.94, which are the industry averages for the pharmaceutical industry.
With these stocks, we also mentioned the number of hedge fund investors. Why do we care about the stocks that hedge funds invest in? The reason is simple: Our research has shown that we can outperform the market by mimicking the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks each quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (Further details can be found here).
A doctor and a patient discuss a treatment plan that includes pharmaceutical products.
GSK plc (NYSE:GSK)
Short interest as % of outstanding shares: 0.60%
Number of hedge fund investors in Q2 2024: 36
GSK plc (NYSE:GSK) is a British pharmaceutical giant headquartered in Brentford. Its global presence and diversified product portfolio, which includes vaccines, specialty drugs and generics, means the company can capitalize on all stages and types of the pharmaceutical chain and all products. GSK plc’s (NYSE:GSK) vast resources, as reflected in its GBP4.9 billion in cash and equivalents, mean the company can go full throttle with drug development. Currently, the company has 70 new drugs in development, including seven drugs in Phase 3 testing. This means GSK plc (NYSE:GSK) has big plans for the future, as it targets revenues of GBP38 billion in 2031. Looking at the present, three of the company’s best-selling products are Menveo and Bexsero, which treat meningitis, and Shingris, an anti-herpes drug. Other fast-growing drugs include a leading disease drug called Nucala and the HIV drug Cavenuva.
GSK plc (NYSE:GSK) management provided key details on its rapidly growing HIV portfolio – a key catalyst – during its second quarter 2024 conference call:
“Our oral 2-drug regimens and long-acting injections continue to transform the HIV market. Dovato had sales of £551 million in the quarter. The body of clinical data and real-world evidence supporting the efficacy and durability of this medicine continues to grow. At the International AIDS Conference last week, results from the PASO DOBLE trial, a large randomised head-to-head clinical trial of Dovato with the 3-drug regimen Biktarvy, showed non-inferior efficacy and significantly less weight gain.
This is important as we know that people living with HIV worry about having to take more medications as they age, and also about the long-term risk of metabolic diseases that can be associated with weight gain. Our long-acting portfolio continues to perform well, contributing more than 50% of overall HIV growth. Cabenuva grew 42%, driven by patient preference and proven and durable efficacy. CASM LATITUDE data presented at CROI and data from real-world cohorts of over 10,000 people living with HIV in different settings were well received by physicians and supported broader and deeper prescribing. Apretude grew more than 100% in the quarter. This medicine has demonstrated greater efficacy compared to daily oral medications, as well as a positive safety profile and high patient preference.
As a reminder, the HPTN 084 pivotal trial of PrEP in women was the first to demonstrate 0 infections in participants receiving injections as per protocol. We believe long-acting therapies are the future of HIV treatment as they give people living with HIV choices and remove the barriers to ending the HIV epidemic. When we look at the long-acting therapies market, we can see that the treatment market is currently around 10 times larger than the PrEP market at around £20 billion, which will have a significant impact on the revenue potential for long-acting options. In the long-acting treatment injection space, there are no competitor launches planned before 2028. We continue to see strong progress across our pipeline.”
Total GSK 9th place on our list of cheap pharma stocks to buy according to short sellers. While we recognize GSK’s potential as an investment, we believe some AI stocks promise higher returns and do so in a shorter time frame. If you’re looking for an AI stock that shows more promise than GSK but trades at less than 5 times its earnings, read our report on the cheapest AI stock.
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Disclosure: None. This article was originally published on Insider Monkey.
