Drug stocks have been out of favor due to regulatory concerns and pricing pressure that will add headline risk throughout the election cycle. Nevertheless, several top-tier stock experts and contributors to MoneyShow.com see select opportunities for long-term value investors to consider buying large cap pharmaceutical names.
Pharmaceutical stocks have been beyond wallflowers in 2019. In fact, some of them, like drug giant Pfizer (PFE) have been right down in the fallen angel category until recently.
Still, if you look at stock charts, it’s hard to ignore that money has been moving into the shares of late; and perhaps with good reason. That’s because deep inside the archives of Pfizer’s drug portfolio is a new medication called Vyndagel, which treats a frequently undiagnosed form of congestive heart failure known as ATTR.
Without getting into the medical weeds, just know that ATTR is a condition in which a protein builds up in the heart muscle resulting in the stiffening of the muscle wall, which eventually loses its ability to contract and pump blood thus leading to heart failure.
The company is educating cardiologists on the condition and how to look for it, inexpensively by the use of a specialized non-invasive radiological test which is also used to diagnose bone conditions.
Now if we take the analysis further, data shows that 40% of patients with carpal tunnel syndrome (pain and numbness in the hands) can develop ATTR, although it is still very early in making sense of this data and there is no way to know how it will pan out.
Nevertheless, if you extrapolate these numbers based on current data, they suggest that there may be as many as 10 million people who may be at risk for ATTR in the U.S. alone.
Furthermore, and this is where it gets interesting and potentially profitable for Pfizer, since Vyndagel is helping people who would potentially end up in the hospital with major heart problems, insurers are actually starting to pay for the medication in more cases than expected, so Pfizer’s sales of the drug are well above expectations and are expected to ramp up as more doctors start to diagnose the condition.
Furthermore, despite management’s past efforts and blunders, PFE is starting to see benefits from their established drugs in oncology, as well as blood therapies (Eliquis) and their rheumatoid arthritis franchise (Xeljans).
Moreover, they are making inroads in biosimilar drugs, getting close to FDA approval for a long acting growth hormone replacement drug and have recently closed a set of pipeline packing biotech acquisitions after their recent jettisoning of their consumer division. Thus, as hard as it may seem, Pfizer may be turning the corner, and for investors with a longer time frame, it may be worth considering nibbling at the shares.
Bristol-Myers Squibb (BMY) is a mega-cap pharma outfit, marketing a long list of pharmaceuticals, including Coumadin and Eliquis, to treat cardiovascular, oncology and immune disorders. In January 2019, the company agreed to buy Celgene in a deal with an equity value of $ 74 billion.
This deal is expected to close at year end and bring along some key treatments cancer and immunological diseases, including Revlimid. As part of the M&A transaction, Amgen (AMGN) will purchase Celgene’s OTEZLA, a psoriasis treatment, for $ 13.4 billion.
That cash influx will be spent quite soon, because Bristol-Myers’ financial priorities include share repurchases, debt repayment and annual dividend increases. In fact, Bristol-Myers just upped their accelerated share repurchase authorization by $ 2 billion, from $ 5 billion to $ 7 billion, which is expected to close when the Celgene merges does.
That is certainly helping bring in buyers, as is the heady dividend (2.9% annual yield), but there’s more to it than that — while the Q3 report didn’t wow investors, it did top expectations, and big investors are looking ahead to a buoyant 2020, when analysts see the firm’s bottom line exploding nearly 50%.
Bristol-Myers trades at just 9 times those earnings estimates. With what will be $ 40 billion-plus in revenue, the combined operation won’t grow like the wind, but there are plenty of reasons for the stock to head higher in the months to come.
After Johnson & Johnson (JNJ) agreed to pay just over $ 100 million to resolve the transvaginal mesh claim, it appears the worst of the company’s legal troubles are now behind it. There will likely be more settlements, as several states from the multi-district litigation were not included in the settlement announcement. That said, $ 100 million-plus is a pittance for this $ 350 billion company.
There was some concern that Johnson & Johnson would take a serious hit from the litigation, and face a payout that would materially affect its bottom line. But that concern has now abated, and it’s all-systems-go from this point on. The stock has risen on news of the settlement. We expect further increases, as this is a fundamentally sound pharma company, and one of the best defensive plays in the market.
Johnson & Johnson is one of only two companies to be rated AAA (the other is Microsoft). That makes the company more dependable than the federal government, which has a AA+ rating. And why shouldn’t it be? The company has raised its dividend in each of the last 56 years.
The company has $ 18 billion in cash and only $ 30 billion in debt. We’re in Johnson and Johnson for the safety and security of the dividend, and the minimal downside risk to the stock. In times of market volatility, every portfolio should be diversified with Johnson & Johnson.
AbbVie Inc. (ABBV) is a cutting-edge U.S. based biopharmaceutical company specializing in drugs and treatments that incorporate biotechnology as a solution to human diseases. The company came into existence in 2013 when it was spun off from Abbott Laboratories (ABT). Since then, it’s gotten big. Abbvie is now the 8th largest pharmaceutical company in the world and the fifth largest biopharmaceutical company.
The company got so big so fast because of the success of its blockbuster autoimmune drug Humira, which is by far the world’s best selling drug with nearly $ 20 billion in annual revenues. Yet, Humira is already facing generic competition (in the form of biosimilars) in Europe and will face competition in the U.S. (which accounts for three quarters of revenue) in 2023.
The market is worried that AbbVie won’t be able to replace the lost revenue on such an important revenue source. However, I believe the concerns are overblown for several reasons. AbbVie has long planned for this eventuality. For years, it has made acquisitions and invested heavily in R&D.
The pipeline is already paying off in a big way. Recently launched blood cancer drugs Imbruvica and Venclexta have impressive growth and appear on the way to being multi-billion dollar blockbusters.
Endometriosis drug Orilissa (launched late last year) will also be a blockbuster drug. As well, Rinvoq and Skyrozo both received FDA approval this year. By some estimates, those two drugs could combine for annual sales of more than $ 10 billion.
In addition, AbbVie announced plans to acquire Ireland-based specialty pharmaceutical company Allergan (AGN) in June for $ 63 billion. About half the size of AbbVie, the company specializes in aesthetics, ophthalmology, women’s health, gastrointestinal, and nervous system products. Its most notable drug is facial rejuvenation treatment Botox.
The acquisition (expected to close in early 2020) will further diversify AbbVie away from Humira. AbbVie will likely be able to quickly pay down the debt it floated to fund the buyout, and it shouldn’t disturb the dividend, which currently yields a whopping 5.46%.
Also consider this. While Humira sales (which currently account for more than 50% of revenues) will decline, they won’t fall off a cliff. Biologic drugs aren’t that easy to duplicate. EvaluatePharm estimates that Humira will still be the world’s top selling drug by the middle of next decade with estimated sales of $ 15 billion per year. Meanwhile, the bigger picture is spectacular. Abbvie is one of the world’s best and most innovative biopharma companies on the cusp of a pronounced demand explosion from the aging population.
Shares of Merck & Co. (MRK) rose as the pharmaceutical giant posted strong Q3 financial results and boosted its guidance for full-year 2019 adjusted EPS. Merck turned in adjusted EPS of $ 1.51, versus consensus expectations of $ 1.24. Revenue for the quarter was $ 12.4 billion, compared to forecasts calling for $ 11.6 billion.
Merck’s key growth driver, oncology drug Keytruda, experienced sales growth of 62% to $ 3.1 billion versus Q3 2018. Merck also enjoyed strong trends in human vaccines, with sales growing 17% year-over-year.
Merck narrowed and raised its 2019 full-year revenue range to between $ 46.5 billion and $ 47.0 billion. The company also narrowed and raised its 2019 full-year adjusted EPS range to between $ 5.12 and $ 5.17.
We expect new cancer drug combinations will further propel Merck’s overall drug sales. We see additional upside in MRK shares as we still believe the market doesn’t fully appreciate its potential upside in immunooncology. The continuing successful data on Keytruda in several indications offers Merck significant growth potential and reinforces the strong pricing power for the drug.
Merck also has a wide lineup of high-margin drugs outside of Keytruda, as well as a pipeline of new drugs, which should ensure strong returns on invested capital over the long term.
The company boasts a history of returning cash to shareholders, a diversified revenue stream and solid free-cash-flow generation. The current dividend yield is 2.5%. We have boosted our Target Price to $ 94.