Over the past several years, the pharmaceutical industry as a whole spiked like a syringe, until political candidates started proposing policies that threaten the industry's profitability. Over the past year, the industry has taking a beating. While some companies deserve their price corrections more than others, the industry as a whole has taken a beating.
With so many Big Pharma stocks trading at bargain prices, it's hard to choose among them. That's why we asked three of The Motley Fool's healthcare analysts which Big Pharma they stock the like best. Here are their favorite picks:
1. Allergan: poised to leap again?
Cheryl Swanson: If your stomach lining can handle some risk in exchange for a bigger upside, I think you can't do better in pharma right now than Allergan plc (AGN). The stock fell off a cliff when its mammoth $160 billion merger with Pfizer collapsed. The upshot is that this leading growth pharma is trading at what Morningstar pegs as 12 times forward earnings, against an average of 27.89 for its pharmaceutical peers in the industry.
Let's handicap the risk first. It's possible the FTC could derail Allergan's sale of its generic-drug business to Teva Pharmaceuticals at the last minute. Anything is possible, and investors need to be aware that Allergan badly needs the deal ($33 billion in cash and about $7 billion in Teva's stock) to shore up its finances.
Post-sale, there should be plenty of catalysts to reignite this growth pharma. In addition to retiring a lot of its debt, Allergan will pick up enough financial firepower to make another growth leap through a strategic acquisition. (Or two, or three, if it focuses on small biotechs.) Allergan has already authorized a new share repurchase program of up to $10 billion of the common stock, through the proceeds of the sale. At current prices, that would mean reducing shares outstanding more than 10%, which shouldn't be overlooked as a potential catalyst.
Could Allergan suffer a Valeant-style implosion? I think those fears are way overblown. Unlike Valeant, Allergan does spend plenty on R&D (some $1.5 billion in 2015), and it has a broad, patent-protected portfolio and a healthy drug pipeline. How healthy? Over 70 drugs are in mid-late studies, and this year alone, it expects 14 approvals and 16 regulatory submissions, with a forecast of sales from new products of up to $15 billion. Understandably, there are going to be divergent opinions on Allergan, and you need to be aware of a potential downside, but that's true of any stock you buy.
2. Roche: an exciting late-stage pipeline
Cory Renauer: If I had to choose just one Big Pharma stock, I'd go with Roche (RHHBY 1.99%) in a heartbeat. I'll start with the bad news: Its aging cancer therapies, Rituxan and Herceptin, first earned FDA approval in 1997 and 1998, respectively. Combined, these two drugs were responsible for 28% of the Swiss giant's $12.87 billion total first-quarter sales.
Now the good news: The company has the strongest late-stage pipeline in the industry, but fear that its top sellers are about to lose ground -- first-quarter sales were up single digits over Q1 2015 -- has Wall Street spooked. It's trading at a little less than 17 times this year's earnings estimates, a multiple slightly lower than the average stock in the S&P 500, making this a very cheap stock, particularly considering its stable of growth drivers is expanding at a mind-blowing pace.
First-quarter sales of Perjeta, Actemra, Xolair, and Activase rose by double digits over last year, each on an annualized run rate of more than $1 billion, and I expect they'll be joined by several recently approved drugs that I think are headed for the stratosphere in the quarters ahead.
First up is recently approved Tecentriq, which works along the same pathway as Bristol-Myers Squibb's Opdivo, a drug that won its first approval less than two years ago and in the first quarter was on an annualized run rate of over $2.8 billion. While Opdivo blocks a "shut-off switch" on immune-system cells in the bloodstream that tumors exploit to stop an immune-system attack, Tecentriq acts on the surface of tumor cells and stops them from hitting the same switch. I think this differentiation will help Tecentriq avoid competition with Bristol's already entrenched Opdivo.
Tecentriq won an accelerated FDA approval in May for treatment of bladder cancer, and you'll want to keep your eyes open for further expansion to a larger lung cancer indication in the months ahead.
Beyond Tecentriq, Roche recently won approval for Venclexta, a drug it will commercialize in partnership with AbbVie, for treatment of a large segment of patients with the most common form of leukemia. Outside of cancer, it has a drug under review for multiple sclerosis treatment that I believe is destined to be a game changer.
Its recently approved therapies and late-stage pipeline should have no trouble offsetting any losses its two top sellers might face and keep this giant growing at a steady clip for many years to come.
3. Johnson & Johnson: growth and stability
Brian Feroldi: Investors interested in buying a Big Pharma stock should be looking for a company with three key attributes in place: stable operations, a history of treating shareholders well, and strong future growth prospects. To me, no other company fits that framework better than Johnson & Johnson (JNJ 2.40%), which is why this is my favorite Big Pharma stock out there.
Investors should love that J&J's business is divided into three major operating segments -- pharmaceuticals, medical devices, and consumer products -- which makes its business about as stable as a Big Pharmas can get. Importantly, J&J's huge product diversification hasn't weakened its competitive position at all. In fact, the company commands the No. 1 or No. 2 market share position in about 70% of the categories it competes in. That the company's revenue is almost evenly split between the U.S. and international markets only adds to the company's stability and allows it to thrive under almost all market conditions.
J&J also boasts a long history of treating its shareholders exceptionally well. The company has increased its adjusted earnings for 32 consecutive years in a row, an unbelievable track record that spans several recessions. Better yet, the company has always been generous in sharing its profits with investors. J&J has increased its dividend for 54 years in a row, and the company regularly uses its excess capital to repurchase shares. Currently, the dividend yield stands at 2.76%.
Finally, despite its immense size, the company has a great chance at continuing to grow from here. J&J's pharmaceutical division continues to be the star of the show, thanks in large part to strong growth in its immunology and oncology products, and the company has plans to file 10 new product candidates for approval over the next few years that each hold $1 billion in annual sales potential. Add in another 40 potential label expansion claims on its existing product line, and J&J holds plenty of growth potential from here.
Despite everything it has going for it, shares are only trading for about 17 times forward earnings estimates. That's not overly pricey for this high-quality business, so I think JNJ is a great Big Pharma stock to consider owning.