Should We Consider Selling Shares of Eli Lilly and Pfizer?
Apparently, no pharmaceutical companies have outshone the sector more in recent years than Eli Lilly (LLY 0.86%) and Pfizer (PFE 0.83%).
The COVID-19 pandemic erupted in 2020, and Pfizer seized the opportunity to lead the charge in developing an effective vaccine. The company garnered billions in revenue from sales of the first approved COVID-19 vaccine. Additionally, Pfizer's oral COVID-19 treatment, Paxlovid, raked in substantial profits.
Currently, Eli Lilly boasts the title of the world's largest pharmaceutical company based on market capitalization. Its phenomenal rise can largely be attributed to the success of its type 2 diabetes and obesity drugs Mounjaro and Zepbound.
However, both stocks have seen a downturn in recent weeks. Lilly's shares have plummeted by nearly 25% from their recent highs, whereas Pfizer's decline is approximately 20%. Is this the time to offload shares in Lilly and Pfizer?
Stepping Stones for the Slide
The primary contributors to Lilly's recent stock downturn can be traced back to its third-quarter earnings report on Oct. 30. The company's Q3 revenue and earnings fell short of Wall Street's expectations. Furthermore, Lilly lowered its full-year earnings and revenue guidance ranges.
Bad news continued to pour in for Lilly on Nov. 14, when the pharmaceutical giant announced its lawsuit against the Health Resources and Services Administration (HRSA). HRSA rejected Lilly's cash replenishment model for reimbursing entities covered by the 340B Drug Pricing Program.
Similarly, Pfizer has encountered some hurdles in recent months. On Sept. 25, Pfizer decided to withdraw its sickle cell disease therapy Oxbryta from all markets due to safety concerns. In August, Pfizer, in partnership with BioNTech, reported underwhelming results from their phase 3 study evaluating their COVID/flu vaccine combination.
Other investors might be uneasy about the pharmaceutical sector's regulatory landscape in the coming years. The proposed head of the Department of Health and Human Services in the incoming presidential administration has expressed skepticism towards obesity drugs and vaccines, including COVID-19 vaccines.
Distinct Traits
Although Lilly and Pfizer share some similarities, their dynamics differ significantly.
The stocks' valuations stand at stark contrasts. Lilly's shares trade at 32 times forward earnings, while Pfizer's forward earnings multiple is just 8.3.
This discrepancy reflects the companies' growth prospects. Analysts predict explosive growth for Lilly's sales over the next decade as Mounjaro, Zepbound, and other medications such as Alzheimer's disease drug Kisunla gain traction. On the other hand, Pfizer faces patent expirations for several of its top-selling drugs within the next few years.
The context surrounding Lilly and Pfizer's recent stock declines also varies. While Lilly's drop is more recent, its stock had more than tripled in value over the past three years before the downturn. However, Pfizer's decline follows a three-year stretch during which its stock price shed over 40%.
Time to Sell?
I cannot guarantee a swift recovery for Lilly and Pfizer stocks, but I don't think it's time to sell them – at least, not for long-term investors.
Lilly's disappointing Q3 earnings and revenue were primarily due to temporary inventory adjustments by wholesalers for Mounjaro and Zepbound and expenses associated with acquiring Morphic Holding. I don't think either issue poses a serious concern.
Nor should investors be alarmed by Pfizer's withdrawal of Oxbryta or the setback for its COVID-flu vaccine combination trial. Although Pfizer faces a patent cliff, it still has emerging growth drivers that should cushion the anticipated revenue losses from patent expirations.
Investors should remain skeptical of any potential changes in the regulatory landscape as well. Lilly and Pfizer have navigated both flourishing and challenging points in the pharmaceutical industry's evolution before, and they are likely to do so again in the future.
In light of the financial implications, Pfizer's decision to withdraw Oxbryta from markets due to safety concerns and the underwhelming results from the COVID/flu vaccine combination trial could impact its investing strategies. On the other hand, the downturn in Eli Lilly's shares might be due to its third-quarter earnings report showing a revenue and earnings fall short of expectations, as well as reduced full-year guidance. These setbacks in finance might temporarily influence individuals' choices in money management and investing in these pharmaceutical giants.
