In today’s ever-changing financial landscape, one question remains: which sector is undervalued and poised for growth? Investors aren’t just seeking sectors that have lagged in recent years; they’re looking for those that could outperform the broader market, especially the S&P 500, in the coming years. One sector gaining renewed interest is biopharmaceuticals, where major names like Merck, Pfizer, Bristol Myers Squibb, Amgen, and Biogen present attractive investment options.
However, two companies tend to steal the spotlight—Eli Lilly and Novo Nordisk—due to the incredible success of their obesity drugs. These GLP-1 treatments have catapulted them to new levels, with Novo Nordisk’s obesity drugs expected to bring in over $100 billion in sales by 2025, while Eli Lilly projects around $20 billion from its treatments, Mounjaro and Zepbound. This rapid growth puts these two companies in a class of their own, making the rest of the sector seem undervalued by comparison.
When you take Eli Lilly and Novo Nordisk out of the picture, the broader biopharma sector shows a noticeable gap in performance compared to the S&P 500. Over the past five years, the group has returned only 61.86%, compared to the S&P 500’s 102.56%. This underperformance continues in the three- and one-year returns. Factors like expiring patents, a lack of new breakthrough drugs, and concerns over price controls have contributed to this trend.
Still, despite these hurdles, the biopharma industry offers solid potential for investors. A major draw is its profitability. Historically, drug companies have enjoyed high profit margins, and that remains true today. The sector’s average EBITDA margin is expected to hit 38% in 2024, far surpassing the S&P 500’s 31%. More strikingly, their net profit margins are forecast to average 24%, compared to the S&P 500’s 17.2%. This shows that despite market pressures, these companies have a strong financial footing.
Valuation is another key factor that makes biopharma stocks appealing. Based on 2025 earnings estimates, the sector’s average price-to-earnings (P/E) ratio is 12.7, much lower than the S&P 500’s 20.6. While a low P/E ratio doesn’t always mean a stock is a bargain, it reflects the market’s current doubts about these companies—an opportunity for long-term investors who can look past short-term concerns.
One of the main issues facing the sector is the belief that innovation is declining. The 1990s were a golden era for biopharma, with breakthroughs in treatments for cholesterol, cancer, HIV, and depression. Today, however, the industry is seen as less innovative, particularly when it comes to addressing complex diseases like Alzheimer’s, Parkinson’s, and ALS. Many investors are wondering if the sector’s best years are behind it.
This is where artificial intelligence (AI) could make a difference. AI offers the potential to revolutionize drug discovery and development, speeding up an industry known for its slow and expensive research process. It can take up to 10 years and billions of dollars to bring a new drug to market, and even then, about 90% of drugs fail during clinical trials—a statistic that hasn’t changed in decades.
AI could change this by analyzing large datasets more quickly and accurately than ever before. Pfizer’s use of AI in developing its COVID-19 vaccine shows what the technology is capable of. AI could not only help identify new drug candidates and predict their structures but also improve patient selection for clinical trials—a key factor in high failure rates. AI’s ability to match patients with the right treatments based on their cellular data could significantly boost trial success rates.
Despite the challenges, the biopharma sector’s strong profitability, attractive valuations, and potential for AI-driven breakthroughs make it an interesting choice for investors. Companies like Merck, Pfizer, Bristol Myers Squibb, Amgen, and Biogen may be undervalued compared to the broader market, but they have strong financials and healthy profit margins. If AI helps speed up drug development, the sector could see substantial growth in the coming years. Adding some of these stocks to a portfolio could be a smart long-term investment strategy, capitalizing on the sector’s strengths and AI’s potential to unlock new opportunities in drug discovery.
Comments