The pharmaceutical industry is highly technical, and significant developments can rapidly transform the sector. For instance, Novo Nordisk‘s (NYSE: NVO) introduction of GLP-1 weight loss drugs was a huge development. Eli Lilly(NYSE: LLY) introduced more attractive GLP-1 drugs, however, leading to Novo Nordisk losing its early lead in the weight loss niche.
More change is on the way, including from Novo Nordisk, but if you have a contrarian bent, you might prefer out-of-favor drug makers Bristol Myers Squibb(NYSE: BMY), Merck(NYSE: MRK), and Pfizer(NYSE: PFE).
Novo Nordisk kick-started the GLP-1 market in a big way. Eli Lilly entered the market with GLP-1 shots that were more attractive. This illustrates how rapidly the pharmaceutical sector can evolve. But the change isn’t over yet, with Novo Nordisk just receiving approval to sell a GLP-1 pill.
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Not surprisingly, many consumers prefer to take a pill over using a shot. Novo Nordisk’s stock jumped on the news of its GLP-1 pill, which is also not a surprise. The pill, which is expected to launch in early 2026, could put the company at the forefront of the pharmaceutical sector once again. Innovation and intense competition are actually normal for drug makers.
The interesting thing is that there are a handful of large and established drug companies that have proven they know how to survive in the industry. They go in and out of favor on Wall Street based on the current roster of drugs they possess, the timing of patent losses on key drugs (also known as a patent cliff), and the quality of the pipeline of the drugs they have in development.
Novo Nordisk, even after the price spike following the approval of its GLP-1 pill, remains down by more than 50% from its high-water mark. Investors might want to look at the discounted shares. But the good news is already out, so if you are a true contrarian, you might be a bit late to the show. There are other options.
Pfizer is probably the riskiest option right now, given that its lofty 6.8% dividend yield makes it appear to be an attractive dividend stock. However, the payout ratio is above 100% at the moment, so income investors should go in with a bit of caution. The company is probably best viewed as a turnaround story.
Essentially, Pfizer’s own GLP-1 drug candidate didn’t pan out. It has a patent cliff approaching on another drug, so this was a significant setback. The company has moved quickly to shore up its drug pipeline, acquiring a company with a promising GLP-1 candidate and partnering with a Chinese company to distribute its GLP-1 drug, pending regulatory approval. In the meantime, Pfizer’s shares are down more than 50% from their high-water mark.
Bristol Myers Squibb is an interesting balance of risk and reward. It has an attractive 4.6% yield, and the payout ratio is around 85%, which gives the company some wiggle room with regard to supporting the dividend. The drug maker is facing a patent cliff, but it has made a series of acquisitions to bolster its pipeline and diversify its target markets.
The next couple of years are likely to be tough on the income statement, as key cancer drugs Revlimid and Pomalyst lose patent protection. However, the company is almost certainly going to survive the hit, and even if the timing doesn’t work out perfectly, introduce new drugs to replace them. The stock is down around 30% from its high-water mark.
Merck is the safest bet if you are a dividend lover, given that its payout ratio is a very reasonable 45% or so. The dividend yield is 3.2% and the stock is off from its highs by around 20%. The story is roughly similar to Pfizer and Bristol Myers Squibb. Merck is facing a patent cliff over the next few years. It is working on its pipeline of drug candidates in an effort to offset the revenue loss that will occur when patents expire.
Cancer drug Keytruda is the big story. However, it won’t lose patent protections until 2028. Merck also has international patents that last into the early 2030s. And the company is working on alternative delivery methods and drug combinations that could extend patent protections into the late 2030s. If you are risk-averse, Merck could be the sale rack option that best suits your needs.
The key to buying Pfizer, Bristol Myers Squibb, and Merck is that these large drug companies have proven they know how to survive within the highly competitive and innovation-driven pharmaceutical sector. They may be out of step right now, but each one has been working hard to solve the patent cliffs they face. Given the history, it is highly likely that all of them will eventually find new and important drugs. Buying now, while Wall Street is deeply negative, could be a good long-term decision.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bristol Myers Squibb, Merck, and Pfizer. The Motley Fool recommends Novo Nordisk. The Motley Fool has a disclosure policy.
