We're in a pharma stock pickers market, says Kessef's Len Yaffe
By CNBC Television
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Key Concepts:
- Pharma stock picking
- Tariffs and pricing changes (favored nations)
- Dividend plays
- Growth drivers
- Patent expiration cycle
- Research renaissance
- GLP-1s
- Immunology
- Kidney disease (polycystic kidney disease, IgA nephropathy)
- Valuation multiples (P/E ratio)
- Biotech investment
1. Pharma Stock Picking in the Face of Uncertainty
- The speaker, Len Yaffe, believes that despite potential headwinds like tariffs and pricing changes, the pharmaceutical sector presents opportunities for stock pickers.
- He identifies two "known unknowns": potential tariffs and major pricing changes related to the "favored nations" concept.
- Yaffe categorizes large-cap pharmaceutical stocks into three groups based on their characteristics.
2. Categorization of Pharma Stocks
- Dividend Plays: These companies may have less impressive pipelines or face patent expiry exposure. Examples include Merck, Pfizer, and Bristol-Myers Squibb, which are going through a significant patent expiration cycle ($200 billion over the next five years). Pfizer is highlighted as a "boring" dividend play with a 7.5% yield.
- Growth-Oriented Stocks: These companies trade at 13-15 times earnings and possess good growth drivers and impressive drugs in their pipelines. Examples include AbbVie, Roche, AstraZeneca, Novartis, and Novo Nordisk.
- High-Growth Stock: Eli Lilly is presented as the best-positioned pharmaceutical company, trading at a multiple of 34 but growing at approximately 28%. Yaffe anticipates that Wall Street estimates for Eli Lilly will need to be raised.
3. The "Research Renaissance"
- Yaffe emphasizes a "research renaissance" in the drug industry, with significant advances in therapeutic categories.
- He mentions potential cures or chronic management solutions for several cancers, advancements in GLP-1s, immunology, and the overlooked area of kidney disease.
- He believes the overriding fundamentals of the industry are strong, despite the uncertainties.
4. Biotech Investment and Valuation
- The discussion shifts to investment in smaller biotech companies.
- Yaffe notes that many companies that went public in 2021 at inflated valuations (e.g., $750 million market caps with preclinical data) have corrected significantly.
- Some of these companies, or those that have gone public more recently, are now trading near cash valuations, despite having potentially exciting compounds.
- He mentions a small company with a $200 million market cap that is developing a promising drug for polycystic kidney disease. Vertex is mentioned as a larger company working on drugs for kidney diseases like IgA nephropathy.
5. Patent Expiration Cycle
- The speaker highlights a significant patent expiration cycle coming up, totaling $200 billion over the next five years. This is a key factor influencing the categorization of pharmaceutical stocks, particularly those considered "dividend plays."
6. GLP-1s (Glucagon-Like Peptide-1 Receptor Agonists)
- GLP-1s are mentioned as an area of significant advancement within the pharmaceutical industry's "research renaissance." These drugs are primarily known for their use in treating type 2 diabetes and, more recently, for weight management.
7. Conclusion
- Despite uncertainties related to tariffs and pricing, Len Yaffe sees a compelling opportunity for stock pickers in the pharmaceutical sector. He emphasizes the importance of understanding the different categories of pharma stocks (dividend plays, growth-oriented, and high-growth) and highlights the exciting advancements occurring in various therapeutic areas, particularly in kidney disease. He also notes the potential for undervalued biotech companies with promising compounds.
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