Pharma Stocks Have Rallied. 2 Stocks to Avoid—and 2 to Buy.

Pfizer Inc. signage on the floor of the New York Stock Exchange. The stock is more attractively priced than many of its competitors. (Michael Nagle/Bloomberg)

Key Points

• The iShares Biotechnology ETF rose over 6% this week, driven by successful melanoma vaccine trial data from Moderna and Merck.
• Analysts estimate the melanoma vaccine will eventually generate $1 billion to $2 billion in annual revenue, which Moderna and Merck will split.
• Eli Lilly’s oral weight-loss pill, Foundayo, recently reached tens of thousands of weekly prescriptions, taking market share from Novo Nordisk.

Biopharmaceutical stocks have emerged winners. Only some will continue to gain.

The iShares Biotechnology Exchange-Traded Fund, home to some large pharma companies and many smaller biotechs, have risen over 6% this week. The main catalyst was that Moderna and Merck announced successful trial data for a melanoma vaccine that reduces the risk patients will experience recurrence. That sent the stocks of both companies soaring.

It also sent the stock of most other drug makers up. “The read-through [from Merck and Moderna] to the others is probably indicative of a broader tailwind of pharma taking some strong actions to improve their long-term growth profiles,” says Cantor Fitzgerald analyst Carter Gould.

Those actions include marketing new GLP-1 weight-loss drugs, rare disease treatments and acute pain medications. Overall, the biotech ETF is up 25% for the year, more than double the S&P 500’s gain.

Such a strong performance—rare for an industry that’s usually seen as less volatile and highly predicable—is why investors must now act more selectively. Some drug stocks are just too expensive. Others are firmly positioned to grow profits.

Moderna is probably firmly in the first category. Its market capitalization is up to $53 billion, even after giving up some gains from Wednesday’s surge, almost than double a roughly $25 billion valuation before the rally. Earnings from the skin cancer vaccine are unlikely to justify such a massive run-up.

UBS analyst Michael Yee sees $1 billion to $2 billion in eventual annual revenue, given the tens of thousands of U.S. patients that would be candidates for the vaccine. Moderna and Merck will split the profits evenly, which translates to roughly $500 million to $1 billion in revenue for Moderna and Merck each.

That doesn’t seem to justify a roughly $28 billion increase in market cap. “We would be hesitant to assume that market value creation substantially exceeds our estimated $8-10 billion contribution from the melanoma opportunity alone,” writes Yee, who rates Moderna stock Neutral.

Given this same math, Merck’s additional $35 billion in market cap is also ambitious. True, unlike Moderna, Merck is highly diversified. The percentage of its total sales that would come from Melanoma would be low, making it less risky than Moderna.

Still, Merck looks expensive. It trades at 21 times expected earnings for the coming 12 months, a tick above the S&P 500’s 20 times. Merck historically hovers at a below market multiple, so its earnings have a lot to live up to. Any disappointments—for its oncology business or any others—could hurt the stock.

Investors shouldn’t overlook Eli Lilly . Although it has already participated in the pharma rally, it is trading at a tolerable valuation. At 29 times forward earnings, it’s only nine points about the S&P 500, versus an 11-point premium earlier this year. So if it far exceeds profit expectations, which it has a record of doing, the stock has more room to run.

Analysts see 30% earnings growth annually from the end of last year through 2028, according to FactSet. That would emanate mostly from 20% annual revenue growth to almost $114 billion by 2028.

Driving the growth is Eli Lilly’s massive GLP-1 business. Its oral pill, Foundayo, which started selling this year, recently hit tens of thousands of weekly prescriptions, according to BMO analysts. Their data show it has taken prescription share from Novo Nordisk’s offerings in recent weeks.

Another stock to consider is Pfizer . Yes, at about $27, it’s at a level where it looks vulnerable, as it hasn’t cracked above $30 since 2024. But the dividend yield of over 6% means investors get paid to wait for the business to improve. If it does, the stock would gain, making the total return look strong.

That improvement could come late this year, when Pfizer is expected to show phase three trial results for Mevrometostat, a prostate cancer treatment candidate. More than three million American men suffer from the ailment, according to the American Cancer Society. This could eventually boost earnings, and “is increasingly becoming a focus for Pfizer investors,” writes Cantor Fitzgerald’s Gould.

Be selective. This is when the winners and losers will surface.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

Copyright ©2026 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8