Do These 3 Healthcare Stocks Need a Checkup?

The pharmaceutical industry is highly competitive, and currently, the leading company in the sector is likely Eli Lilly (NYSE: LLY). That's driven by the fact that Eli Lilly makes the weight loss drugs Zepbound and Mounjaro, which together account for over 50% of the company's revenue. That's an interesting statistic because it highlights both the risk and opportunity that exists in the drug sector.

If you own or are considering buying pharma laggards Pfizer (NYSE: PFE), Bristol Myers Squibb (NYSE: BMY), and Merck (NYSE: MRK), here's a checkup on their businesses, and some reasons why you might want to buy them.

Beyond the curve in pharma

To get the bad news out of the way right up front, Pfizer, Bristol Myers Squibb, and Merck have all missed out on the early success of a new class of weight loss drugs known as GLP-1 drugs. Wall Street tends to favor innovators and first movers, so these three drug giants, despite long and successful histories, are deeply unloved right now.

Image source: Getty Images.

Making matters worse, each of these companies is also facing the expiration of patents for important drugs in the next few years. Because of the time and expense of bringing new drugs to market, drugmakers are granted a period in which they can sell a drug exclusively. This can result in substantial profits. When the exclusive period ends, known as a patent cliff, revenue and earnings from the drug can fall sharply.

Overall, Pfizer, Bristol Myers Squibb, and Merck appear to be missing out on an important new drug development, and they are likely to face revenue and earnings headwinds in the coming years. No wonder investors are downbeat on these pharmaceutical giants.

To put some numbers on that, Pfizer is down nearly 60% from its 2021 highs. Bristol Myers Squibb is down nearly 40% from its 2023 highs. And Merck is still 20% below its 2024 highs even after a recent stock rally.

Don't count Pfizer, Bristol Myers Squibb, and Merck out

The interesting thing here is that patent cliffs are a normal occurrence in the drug space, so this is an issue that these historically successful companies are accustomed to dealing with. And the complexities of drug development are normal, too. Nothing that Pfizer, Bristol Myers Squibb, and Merck are currently facing is shocking. In fact, it is just business as usual for a drug company. Investors, however, tend to favor new and exciting developments, so they are focused on Eli Lilly and the hot drugs of the day, which are weight-loss medications.

There's a warning here, however. Eli Lilly is currently leading the market, but Novo Nordisk (NYSE: NVO) was actually the first to market with Wegovy and Ozempic. That highlights the important fact that being an industry leader in the pharma sector can be a temporary event. It also highlights the fact that a new drug can quickly become a significant profit center. That said, Pfizer recently agreed to buy Metsera to bolster its drug pipeline thanks to Metsera's promising weight-loss drugs.

But Pfizer, Bristol Myers Squibb, and Merck are all working on new drugs to offset the hit from their respective patent cliffs. If history is any guide, they'll all survive and thrive over the long term, eventually developing or buying drugs that turn into blockbusters. If you think in decades and not days, you'll probably favor Pfizer, Bristol Myers Squibb, and Merck over a hot stock like Eli Lilly, which increasingly appears to be priced for perfection. But there are some important risks to consider, particularly if you are a dividend lover.

Pfizer's 6.8% yield is highly attractive, but it comes with a 100% dividend payout ratio. That makes it the highest-risk option. Bristol Myers Squibb has a 5% yield, which comes with a roughly 80% payout ratio. That's not unreasonable, but the payout ratio is still high enough that more conservative types may want to steer clear. Merck's 3.3% dividend yield looks the most secure, given its payout ratio of 40% or so.

Pfizer, Bristol Myers Squibb, and Merck are survivors

Pfizer, Bristol Myers Squibb, and Merck have proven track records in the pharmaceutical sector, and it is highly likely that they will all weather their current headwinds. They are currently behind the pack, but Novo Nordisk being surpassed by Eli Lilly proves that leading the pack can be a fleeting pleasure.

While Pfizer, Bristol Myers Squibb, and Merck each have their own little nuances to consider, they are each worth a deep dive despite their current industry positions. Just go in recognizing the risk on the dividend front if you are looking at Pfizer and even Bristol Myers Squibb. For conservative dividend investors, Merck is probably the best bet despite its more modest yield.

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.