JPM Healthcare Conference
Pharma: the overlooked opportunity in 2025
Pharma stocks got a bad rap in 2024. Politicians love to hate these companies and their expensive drugs. However, the Inflation Reduction Act forces pharmaceutical companies to depend less on price hikes and instead focus more on developing new drugs less susceptible to price negotiations.
Many have done an excellent job diversifying their pipelines over the last few years. These strategic pipeline investments have largely been overlooked by the market, leading to an arbitrage situation, where enterprising investors can capture massive wealth creation potential on undervalued terms.
Here is a short rundown of potential blockbuster medicines the market hasn’t priced in yet.
Merck
MRK has done an amazing job in broadening its pipeline. At the start of 2024, MRK had a portfolio of new drugs expected to bring in $35B in additional revenues, now this number has grown to $50B. MRK has 26 trials ongoing in phase III, up from 9 in 2021. Several of these therapies have blockbuster potential.
One example is HIV, where MRK has opened up an avenue to partner with Gilead Sciences to capture a revenue potential of around $5B. We’re talking about MRK’s new drug Islatravir, which in combination with Gilead’s drug Lencapavir represents a game changer in the treatment of HIV. Islatravir blocks the virus from copying itself. Lenacapavir, on the other hand, disrupts the virus's protective shell, preventing it from infecting new cells and reproducing. This combination attacks HIV at multiple stages of its life cycle, sharply reducing the virus count in infected patients, while simultaneously being efficacious in preventing new HIV cases.
Bristol Myers Squibb
BMY is entering a data-rich period with readouts from 40 clinical trials moving into later stages. In 2025, five relatively new products are expected to deliver at least 50% of the revenues. These new therapies will grow fast from here on.
Neuroscience is an example of an exciting new growth area. BMY’s new drug Cobenfy is the talk of the town. Cobenfy is outperforming benchmarks set by other branded schizophrenia drug launches and the launch of the drug has been very positive. This year, BMY hopes to get positive results from trials in the treatment of Alzheimer’s disease psychosis. No one believes that Cobenfy will fix Alzheimer’s, but we have already gotten strong indications that the drug reduces delusions, hallucinations, and paranoia often exhibited by patients. Needless to say, as people get older and older, Alzheimer's is a giant market.
Amgen
AMGN’s revenue growth was over 20% in 2024 This didn’t help in the stock market. The stock was down 10% in the last year.
There is nothing wrong with AMGN’s business. Prospects are strong. AMGN has several market-leading drugs for heart disease, osteoporosis, asthma, and rare diseases. Furthermore, it has a new drug candidate in the obesity space which differentiates itself enough from other treatments to get approval from regulatory bodies. Most markedly, however, is global Wall Street’s undervaluation of AMGN’s innovative oncology portfolio with the industry-leading BITE platform. The BITE platform will spin out several new drugs in the coming years. We have Imdeltra in small cell lung cancer and Fortitude in gastric cancer that likely will come to the market in 2025/2026.
Despite all this, why aren’t investors more constructive on the stock? Investors have been fixated on AMGN’s new obesity drug candidate, MariTide, causing significant volatility in the company's stock price. The narrative surrounding MariTide has swung between positive and negative, with shares soaring 12% in May 2024 on promising initial data, only to drop 7.4% in November following Phase 2 trial results that fell short of heightened expectations. This intense focus on MariTide has overshadowed the strong existing portfolio, demonstrating solid performance in Q3 2024 with 23% year-over-year revenue growth and several key products showing double-digit sales increases. The company's established products and new drugs in the pipeline continue to provide long-term visibility for stable and consistent revenue growth, a fact that seems underappreciated amid the obesity drug hype.
I will add to my AMGN position rather than sell out. My approach is to tune out the short-term market sentiment, concentrating instead on fundamental growth catalysts that will meaningfully advance AMGN’s intrinsic value.
Abbvie
ABBV faced a significant setback in the stock market following the failure of its schizophrenia drug candidate, Emraclidine, in phase II trials. The drug, a prospective competitor to Cobenfy, missed crucial goals, leading to a $3.5 billion write-off and a reassessment of its value. This failure caused ABBV’s shares to plummet, bringing into question the company's long-term neuroscience strategy.
However, this market re-rating could present a potential buying opportunity for investors. Despite this setback, ABBV maintains a strong current sales portfolio and a robust pipeline, including promising candidates like Tavapadon for Parkinson's disease, which recently met key objectives in a late-stage study. So all hope is not over for ABBV’s potential neuroscience drugs It must be stated that ABBV’s research spans several areas: immunology, oncology, inflammation, and eye care. Neuroscience has never been an important part of the business, but there is hope it can be.
Wise investors are smart to note that ABBV’s future success doesn’t hinge on neuroscience. ABBV has plenty of things going right.
Sarepta Therapeutics
Industry followers expect that we will see a pick-up in deal activity in 2025, meaning more specifically that big pharma will acquire smaller biotech firms.
SRPT has emerged as an intriguing takeover target in the biotech sector, largely due to its strong position in the Duchenne muscular dystrophy (DMD) market. The company's wide moat in muscle dystrophy treatments, particularly with its FDA-approved gene therapy Elevidys, has solidified its leadership in this niche. SRPT’s revenue growth prospects are impressive, with the company reporting a 75% year-over-year increase in total net product revenue for Q4 2024, and Wall Street projects revenues to double from here in a few years. This robust financial performance in combination with an innovative pipeline and market position, makes SRPT an attractive acquisition candidate for larger pharmaceutical companies looking to expand their rare disease portfolios.
Conclusion
In sum, there are so many undervalued companies in this sector right now that one can’t make many mistakes by allocating some parts of the portfolio here in 2025.
Disclaimer: Important Information for Retail Investors
The information in this blog is for educational purposes only, not financial advice. Investing in stocks carries risks; past performance doesn't guarantee future results. Conduct thorough research and seek advice from financial professionals before investing.
The author is a retail investor, not a licensed advisor. Content accuracy isn't guaranteed due to changing market conditions. All investments have risks, including the potential loss of principal. Assess risk tolerance and goals before investing; diversification is key to managing risk.
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