Healthcare Stocks Are at an Historic Low and a Turnaround Is on the Horizon

Key Points

• It is a good time to invest in healthcare stocks. Investors should look into Pfizer and Vertex Pharmaceuticals.

• Pfizer's financial results and pipeline have improved, which should allow it to overcome upcoming headwinds.

• Vertex Pharmaceuticals is becoming more diversified while maintaining its high-performing core franchise.

• 10 stocks we like better than Pfizer ›

According to some research, healthcare stocks are about as cheap as they have been in three decades. Many have experienced significant headwinds recently, but for opportunistic investors, now may be a great time to explore the industry for potential deals. Plenty of promising, yet beaten-down, healthcare stocks can be had at reasonable valuations relative to their growth potential.

Two that are worth serious consideration are Pfizer (NYSE: PFE) and Vertex Pharmaceuticals (NASDAQ: VRTX). Here's more on these drugmakers.

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1. Pfizer

Pfizer is staring down the barrel of several patent cliffs that should happen by the end of the decade. For example, the company's anticoagulant, Eliquis, will lose patent exclusivity by 2029 at the latest. The market is factoring that in, and in addition to the poor financial results Pfizer has produced lately, it explains its terrible performance on the market over the past few years.

However, Pfizer is rebounding. In the second quarter, Pfizer's revenue increased by 10% year over year to $14.7 billion. The company's adjusted earnings per share grew 30% year over year to $0.78. These are strong results for a pharmaceutical giant.

Furthermore, Pfizer's pipeline should enable it to overcome the upcoming loss of patent exclusivity. The company has earned approval for several new products in recent years that are still in their early growth stages, especially considering that some of them are expected to receive label expansions. Abrysvo, a vaccine for the respiratory syncytial virus, is one such newer product whose second-quarter revenue increased by 155% year over year to $143 million.

Elsewhere, Pfizer has significantly improved its pipeline in recent years through licensing deals in acquisitions. The company's oncology pipeline appears particularly promising, boasting dozens of programs, at least some of which should yield excellent clinical results in the coming years.

Lastly, Pfizer has been engaged in cost-cutting efforts. The company is on track to deliver net cost savings of $4.5 billion by the end of the year and $7.2 billion by the end of 2027. These initiatives should help boost Pfizer's bottom line, and they are even more important considering President Trump's aggressive tariffs.

Pfizer's overall business still looks robust enough to recover, despite upcoming headwinds. The stock's forward price-to-earnings (P/E) ratio of 7.7 appears dirt cheap when compared to the industry average of 16.5 for the healthcare sector. The stock is a great choice for value investors right now.

2. Vertex Pharmaceuticals

Vertex Pharmaceuticals' forward P/E tops 20, which makes the stock look fairly expensive compared to its healthcare peers. And when we consider that the company has encountered setbacks this year, including clinical trial failures and the distribution of some illegal knockoffs of its medicines in Russia, which has impacted its sales, the picture looks even bleaker.

But at current levels, Vertex Pharmaceuticals looks attractive considering its potential. For one, the company still holds a monopoly in cystic fibrosis (CF), a rare lung disease. And in that niche, Vertex Pharmaceuticals has a reasonable amount of whitespace. Although its first CF medicine has been on the market for over a decade, Vertex has developed newer and better products.

Trikafta and Alyftrek, Vertex's newest launches in CF, won't lose patent exclusivity until the late 2030s. In the meantime, thousands of patients eligible for these medicines remain untreated. Translation: Expect reasonable revenue growth from this franchise for the foreseeable future.

Now add to that the company's newer launches: Journavx in acute pain and Casgevy in beta-thalassemia and sickle cell disease. The former fills a need: It became the first approved oral, non-opioid pain inhibitor. Opioid-based therapies come with the risk of addiction and other potentially severe adverse reactions. Journavx was only approved in January. It should make a meaningful impact on Vertex's results sooner rather than later.

Casgevy's case is a bit different. It first earned regulatory approval in late 2023, but it has not yet contributed significantly to Vertex's sales. That's because it is an expensive gene editing therapy that is complex to administer. However, Vertex Pharmaceuticals is making progress in securing deals with third-party payers. Casgevy has little competition and should also, eventually, see its sales ramp up.

Beyond that, Vertex Pharmaceuticals could earn approval for zimislecel, a therapy for type 1 diabetes, within two years. The company also has late-stage candidates that could make significant progress in the meantime. Vertex still has significant upside from its current levels. The stock has faced headwinds this year, but a turnaround is, indeed, on the horizon for the biotech stock.

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Prosper Junior Bakiny has positions in Vertex Pharmaceuticals. The Motley Fool has positions in and recommends Pfizer and Vertex Pharmaceuticals. The Motley Fool has a disclosure policy.