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4 Top Drug Stocks That Can Be Purchased on the Cheap This Fall

By Sean Williams – Updated Oct 26, 2016 at 6:04AM

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Healthcare bargains abound for patient long-term investors.

Some great drug stocks could be hiding in plain view. Image source: Getty Images.

U.S. stocks have been taken for a wild ride in 2016, but at least most long-term investors can relish the fact that despite the volatility, the broader market indexes are all higher year-to-date. The same can't be said for the SPDR S&P Biotech ETF or VanEck Vectors Pharmaceutical ETF, which are down 15% and 16% year to date, respectively.

These top drug stocks are cheap and possibly worth buying

Drug stocks sold off hard to begin the year as investors sought the security of less risky, profitable investments. Remember, most drug developers aren't profitable on a recurring basis, meaning valuations can be prone to wild swings based on emotions and clinical data. While this move lower in drug stocks has left some investors in the sector disappointed, it's also created quite the opportunity to pick up top drug stocks on the cheap this fall. Here are four cheap drug stocks worth considering for your portfolio.

Teva Pharmaceutical Industries Ltd.

Israeli-based Teva Pharmaceutical (TEVA -1.05%) isn't exactly a household name, but with its shares down 35% year-to-date, perhaps it should be for investors.

Teva's business has traditionally been split into two components: branded therapeutics and generic drugs. The biggest concern for Teva has been that its biggest branded therapeutic, Copaxone, a long-standing injectable treatment for multiple sclerosis, lost patent protection and is facing exposure to generic competition. With Copaxone at one time accounting for more than 20% of Teva's sales, the fear had been that Teva's growth could stall for years to come.

Image source: Teva Pharmaceutical.

However, Teva's been a busy bee. It used legal wrangling to keep a generic version of Copaxone off the market for as long as possible in order to reformulate Copaxone into a more convenient dosage that could be injected less often. This new formulation that was introduced should allow Teva to switch longtime customers over without losing many of its customers to generic versions of its original Copaxone injection.

Teva also acquired Allergan's generic drug division, Actavis, in a $40.5 billion cash-and-stock deal. Some analysts have been leery about how quickly Teva will realize benefits from this deal, and they've also been concerned with asset sales Teva has had to make in order to appease regulators in Europe. Ultimately, though, this could be a giant growth-driver for Teva, which now becomes the largest generic drug manufacturer in the world. With IMS Institute for Healthcare Informatics predicting that generic scripts could make up 91% to 92% of prescriptions written by 2020, Teva presumably could be a volume and pricing power winner.

Currently trading at just over seven times Wall Street's 2017 profit projections and paying out more than 3% annually, Teva looks like a cheap drug stock worth your consideration.

Gilead Sciences Inc.

Perhaps the only other drug stock that can give Teva Pharmaceutical a run for its money in the value column is biotech blue-chip Gilead Sciences (GILD 1.57%). Gilead's shares are down 28% this year as hepatitis C sales declines have disappointed Wall Street and investors.

You could say that Gilead Sciences has become a victim of its own success. Increasing competition in hepatitis C, along with hitting the low-hanging fruit in the United States, have tempered HCV sales expectations going forward. During the second quarter, Harvoni sales declined by more than $1 billion to $2.56 billion, leaving Wall Street wondering where Gilead's next growth surge will come from.

Image source: Getty Images.

The good news for Gilead and its shareholders is that hepatitis C should remain a strong cash cow for many years to come. Though competition in HCV does exist, Gilead is likely to retain most HCV market share for a variety of reasons. For example, there's nothing that's more convenient or effective than Harvoni or it's recently introduced pan-genotypic oral HCV pill, Epclusa. There's always a possibility that another drugmaker could develop a treatment that's effective at removing the hepatitis C virus at four or six weeks, but any such therapy is likely many years out at best. Gilead's rapport with physicians in HCV and the effectiveness of its HCV drugs should result in substantial cash flow generation year in and year out.

Gilead could also benefit from using its cash flow to make acquisitions. In Nov. 2011, Gilead acquired little-known Pharmasset for $11 billion, giving it access to what would eventually set the foundation to its blockbuster HCV franchise. Gilead could look to bolster its dominant antiviral portfolio and angle for a hepatitis B or nonalcoholic steatohepatitis cure, or it may opt to join the fast-growing cancer drug space.

Like Teva, Gilead is paying out an above-average yield of 2.6%, and it's trading at a minuscule six times next year's estimated full-year EPS. It just about doesn't get cheaper than that.

Bristol-Myers Squibb Co.

Another big drug stock to take it on the chin recently is Bristol-Myers Squibb (BMY 1.04%). Shares of Bristol-Myers are down 28% year-to-date and 35% over the past three months. The reason? Look no further than its recent CheckMate-026 results.

In August, Bristol-Myers Squibb announced that its blockbuster cancer immunotherapy Opdivo had failed to reach its primary endpoint of a statistically significant improvement in progression-free survival (PFS) for first-line non-small cell lung cancer (NSCLC) patients whose tumors had PD-L1 expression of 5% or greater.

A couple weeks ago we got the specifics of the CheckMate-026 trial, with the chemotherapy placebo actually demonstrating modest favorability in PFS and Opdivo having a slight edge in overall survival. Compounding Bristol-Myers' woes, competing cancer immunotherapy Keytruda, developed by Merck, met its mark with flying colors in first-line NSCLC in patients whose tumors had at least 50% PD-L1 expression. Losing out on first-line NSCLC could cost Opdivo a few billion dollars in peak sales, and Wall Street is none too pleased.  

Image source: Bristol-Myers Squibb.

Despite this disappointing result, investors should keep a couple of things in mind about Opdivo. For starters, it tends to work best as a combination therapy, and CheckMate-026 was a monotherapy study. Secondly, it's not uncommon for cancer drugs to respond differently to separate types of cancer. Lastly, Opdivo, remains a standard-of-care therapy in second-line NSCLC and second-line renal cell carcinoma. It has numerous ongoing combination trials as well which could easily lead to expansion opportunities. For Bristol-Myers Squibb, Opdivo's latest hiccup may prove to be nothing more than a speed bump.

Don't forget that Bristol-Myers Squibb also has a growing pipeline and some rapidly growing existing therapies. Eliquis, an oral blood-thinning drug that was developed with Pfizer and could have ample label expansion opportunities yet to come, is on track for more than $3 billion in annual sales this year. Through the first-half of 2016, sales of the drug are up 91%.  

With its PEG ratio hovering around one, and Bristol-Myers still sitting on a veritable gold mine in Opdivo, investors should take notice.

Celgene Corporation

A final biotech blue-chip that always seems to be cheap is Celgene (CELG). Shares of the company are down 18% year-to-date.

The wind came out of Celgene's sails earlier this year when the drugmaker, which is known for its transparency, provided sales and profit guidance for fiscal 2017 that were slightly below expectations. The reason for the lowered earnings guidance primarily rests with lung, breast, and pancreatic cancer drug Abraxane, which has seen slower growth in the wake of tougher competition from cancer immunotherapies.

Image source: Getty Images.

However, Celgene is far more than just Abraxane. The company's lead therapy is multiple myeloma blockbuster Revlimid, which looks to be on pace for $10 billion in annual sales by the end of the decade, if not more. Revlimid has benefited from an increased number of multiple myeloma diagnoses, consistent or growing market share, improved pricing power, and the potential for more than a half-dozen label expansion opportunities still to come.

Celgene could also reap significant rewards from its M&A and collaboration strategies. Celgene acquired Receptos for $7.2 billion last year in order to gain hold of ozanimod, an experimental oral drug with a lot of promise to treat multiple sclerosis and ulcerative colitis. Celgene's management team believes ozanimod could have the potential to eclipse $4 billion in annual peak sales.

In terms of collaborations, Celgene has more than 30 licensing partners that could translate into it getting a piece of the pie in numerous first-in-class oncology or anti-inflammatory therapies. Relying heavily on collaborations also means that Celgene is spending its money on only the most promising drug candidates.

A sub-one PEG ratio makes Celgene a drug stock to closely monitor.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of and recommends Celgene and Gilead Sciences. It also recommends Teva Pharmaceutical Industries, and has the following options: short October 2016 $95 puts on Celgene and short October 2016 $85 calls on Gilead Sciences. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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