2 Pharmaceutical Stocks to Buy at a Discount

If you see news about the pharmaceutical industry today and it isn't directly about GLP-1 weight loss drugs, it's likely to include at least a mention of this new class of medications. GLP-1 drugs are an exciting development, for sure. However, Wall Street has a bad habit of getting so myopically focused on one thing that stock prices become irrational.

This is why you might want to look at Bristol Myers Squibb (NYSE: BMY) and Merck (NYSE: MRK) today. Here's a look at each one.

The GLP-1 poster child

You need to have a reference point when you examine valuations. Right now, the best reference point is GLP-1 leader Eli Lilly (NYSE: LLY). There's no question the company is doing exceptionally well right now, having taken the pole position in a hot new drug niche with Mounjaro and Zepbound.

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However, investors are well aware of this fact and have pushed the share price up accordingly. Today, Eli Lilly's price-to-earnings ratio is just shy of 50, which is actually a hair below the five-year average of 53. But 50 is a shockingly large P/E.

And it's important to recognize that the company's two GLP-1 drugs already make up more than 50% of revenue. That's a troubling number, noting that Eli Lilly took the pole position away from Novo Nordisk in the GLP-1 race, which shows that sustained industry dominance isn't guaranteed.

Two other options in the pharma sector

A key fact in the pharmaceutical sector is that new drugs receive patent protection, which enables drugmakers to generate substantial profit. However, when those drugs lose their patent protections, the outsize profits come to an end. This is known as a patent cliff, and it's a common phenomenon within the pharmaceutical sector. In other words, all drug companies are on a continual quest for new drugs. Eli Lilly is in the spotlight today, but at some point in the future, other drugmakers will be more interesting.

This is why you might want to consider Merck and Bristol Myers Squibb as discounted alternatives to an in-the-spotlight drugmaker like Eli Lilly. Notably, Merck's focus is on cardiovascular conditions, cancer, and infectious diseases. Bristol Myers Squibb is centered on cardio, cancer, and immune disorders drugs. They aren't really competing with Eli Lilly in the GLP-1 race, and thus, investors, broadly speaking, have been less attuned to what's happening at the companies.

That's resulted in far more attractive valuations. Merck's P/E ratio is 13, below its five-year average of 21. Bristol Myers Squibb's P/E is 17.5. The five-year average isn't meaningful because of recent losses, but the current P/E is still significantly below that of Eli Lilly. Merck's dividend yield is 3.4% while Bristol Myers Squibb's yield is 4.7%. Eli Lilly's yield, for reference, is just 0.6%.

If you're a dividend investor, it would be wise to acquaint yourself with Merck and Bristol Myers Squibb. That said, Merck's dividend payout ratio of roughly 45% will be far more attractive to conservative investors than Bristol Myers Squibb's nearly 85% payout ratio. Still, either one of these stocks is going to be more attractive from a valuation standpoint than an in-the-spotlight stock like Eli Lilly.

These industry leaders aren't going away

The real key here, however, is that Merck and Bristol Myers Squibb are drug industry giants that have proved that they know how to survive and thrive over the long term. Just because Wall Street is enamoured of a specific type of new drug doesn't mean other drugmakers aren't interesting investments.

While investors are rushing like lemmings into GLP-1 leader Eli Lilly, you might want to consider a contrarian move and examine discounted alternatives like Merck and Bristol Myers Squibb.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bristol Myers Squibb and Merck. The Motley Fool recommends Novo Nordisk. The Motley Fool has a disclosure policy.