Send me real-time posts from this site at my email
Motley Fool

2 Great Pharma Stocks to Buy in the Next Market Crash

AbbVie (NYSE: ABBV) and Gilead Sciences (NASDAQ: GILD) are stable giants in the pharmaceutical industry. Both companies have an extensive array of products on the market, not to mention plenty of promising drugs in development. Between their attractive dividend yields in excess of 4% and their steady long-term growth potential, there's a lot to like about these stocks.

Neither company is perfect, however. Both have underperformed the market over the past five years. Gilead's profit margin is currently negative, and its quarterly revenues shrank by 9.5% year over year. AbbVie, while profitable, has taken on a tremendous $87.5 billion in debt, and it may not have enough cash on hand to cover its short-term debt obligations. These issues should give investors pause at today's price level.

But, when we explore the two stocks a bit more, we'll find that these problems are likely transient in nature, meaning that a market crash could set up the opportunity for larger returns than we'd otherwise expect.

Image source: Getty Images.

Gilead's unprofitable stint will soon end

Gilead was hit hard by the COVID-19 pandemic, with its second-quarter revenues contracting sharply as a result of a dramatic decrease in new patients for its leading HIV treatment and prevention drugs. At the same time, the company's research and development (R&D) expenses rose by 19% over 2019. Management attributes this increase to new clinical trials of its antiviral drug remdesivir, which may reduce recovery time from coronavirus infections.

There are several pieces of information to suggest that the revenue issues are temporary. First, the company expects enrollment of new patients in its HIV therapies to start picking up again by the end of the year. From 2011 to 2020, its HIV drugs exhibited a compound annual growth rate (CAGR) of 12%, so additional expansion will translate to revenue quite readily. Furthermore, now that Gilead has licensed remdesivir to generic drug manufacturers, it won't be under as much pressure to scale up its production capacity, ensuring that its R&D budget doesn't need to remain at its present level.

Gilead's financial situation will likely return to normal sometime in 2021 as the pandemic ebbs. If the market crashes in the meantime, pharmaceutical investors who buy in will thus get a larger return when the stock returns to regular growth shortly thereafter.

SPY data by YCharts

AbbVie seeks to shed its debts

After buying cosmetics company Allergan this year for $63 billion in cash and stock, AbbVie was left with tens of billions of dollars in long-term debt. Its $5.4 billion in current debt and its $19.3 billion in payables and accrued expenses look daunting, especially compared with its $6 billion in cash and equivalents. How could AbbVie possibly be worth a buy when it doesn't have enough cash to cover its short-term expenses, never mind its mountain of looming debt payments?

The answer is that while AbbVie did shoulder a lot of debt with the Allergan purchase, it also took on Allergan's revenue. In fact, Allergan brought AbbVie's second-quarter revenue up by a shocking 26.3% year over year to reach $10.4 billion. While Allergan's portfolio of beauty products, such as Botox, took a revenue hit of about 43% in the second quarter because of the coronavirus pandemic, it still added to AbbVie's bottom line.

In short, as the pandemic subsides, Allergan's beauty products will sell even better, and AbbVie will have the cash flow it needs to pay for its expenses and also to service its debt. If the market crashes again, the company's debt will look even more outsized in comparison to its equity. But it still won't matter, because its revenues will continue increasing regardless. Thus, in the long term, investors who take advantage of a market crash will also get the additional benefit of the company's fundamentals improving as it pays down its debt amid rising revenues -- a particularly attractive situation to be in.

10 stocks we like better than Gilead Sciences
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Gilead Sciences wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of August 1, 2020

Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Gilead Sciences. The Motley Fool has a disclosure policy.


Source

Popular posts

Welcome! Is it your First time here?

What are you looking for? Select your points of interest to improve your first-time experience:

Apply & Continue