With both presidential nominees pushing for drug-price reform, investors need to start protecting themselves. There's no need to dump all your pharma holdings, you may want to pull away from those that lean on eye-popping price increases on old drugs to prop up their revenue and instead turn toward those that are blazing new territory with pioneering meds, adding millions in new sales along the way. To put it simply, pharmas and biotechs that rely on innovation to drive returns, rather than on price-gouging, are likely to be the best healthcare stocks going forward.
Drugmakers that create best-in-class drugs have built-in pricing power. Three stocks in particular come up big on that list: Celgene (CELG), Bristol-Myers Squibb (BMY -0.39%), and, surprisingly, Eli Lilly (LLY 0.51%). Not only do these drugmakers eschew above-inflation price increases on their old meds, but their new therapies could also save lives, making them much less vulnerable to pushback by politicians or payers.
Let's look at each stock in turn
Celgene's cutting-edge therapies make it nearly unstoppable
Celgene's earnings climbed 28% in Q3, and revenue soared 28% to $2.98 billion. Even better, while fellow biotech Amgen (NASDAQ: AMGN) is growing by ramping up prices on drugs whose market share is eroding, Celgene's revenue growth was driven by increased volume.
Specifically, Celgene's superstar multiple myeloma drug, Revlimid, ramped up 30.1% last quarter, driven by greater prescriber adoption and longer duration of therapy. Despite that success, Celgene's stock has been caught up in the general fear over potential limits on drug prices. The stock was down 18% for the year, before the Q3 earnings report tacked on 3.4% after hours on Thursday.
I scooped up some shares recently, because Celgene's focus on extremely powerful and novel therapies, such as CAR-T, Ozanimod, and CELMods, gives it tremendous pricing power. The concept that a product that works much better deserves a price premium is universal to all sectors of the economy, not just healthcare, so these medications are the least vulnerable to pricing pushback.
In fact, while we're hearing a lot of flap over pricing, the only drugmakers Congress is targeting thus far have been those guilty of attempting highway robbery with old drugs, such as Turing Pharmaceuticals' upping the price on an HIV pill from $13.50 to $750 per pill. Meanwhile, Celgene has 50 potential new product approvals in over 100 indications pending by 2025. Many therapies have a chance to end up best-in-class, or first-line treatments, so Celgene should rack up double-digit growth for years to come with little pricing vulnerability.
Bristol-Myers rocks earnings, thanks to new products
Bristol Myers blew past analyst estimates last quarter, with revenue up 21% to $4.9 billion. More importantly, the company has plenty of fuel to maintain rapid growth.
Specifically, Bristol's new products should chip in a full 65% of 2020 sales. That sets this 3.1% dividend-paying stock up as a great choice for investors looking for both growth and income. Bristol's reliance on new drugs should bring above-average earnings growth for many years, with limited political pressure coming to bear.
Bristol's stock is particularly appealing because it presents a bargain right now, having lost nearly a third of its value last summer after cancer immunotherapy Opdivo failed an advanced lung cancer trial. That could go down as one of the dumbest market overreactions this year. Losing out to Merck's (NYSE: MRK) Keytruda for advanced lung cancer hurt, but Opdivo is currently in more than 50 clinical trials and could easily become one of the best-selling drugs in the world in the next five years.
Recently, Bristol sharply raised its forecast, reflecting its impressive pipeline of specialty medicines. This company pioneered cancer immunotherapy and relies little on price increases, and I'd expect it to be a terrific performer in pharma's new price-conscious world.
Eli Lilly has a catalyst coming that could skyrocket the stock
Ready for an unexpected choice? I believe 2.8%-yielding pharma Eli Lilly has a big ramp-up coming, because new drugs should bring in a full 50% of sales by 2020. In fact, if you look deeper into Lily's recent disappointing quarter, you'll see its modest growth -- 4.7% in revenue versus a year earlier -- all came from growing demand for recently approved products.
Better still, its new drugs are at the beginning of their launch cycles, contributing only around 10% of the $5.2 billion in reported revenue, so big acceleration should be coming. Specifically, Lilly's trio of outstanding new drugs -- psoriasis drug Talz, gastric cancer med Cyramza, and diabetes drug Trulicity -- have seen sales starting to surge. In addition, Lilly's SGLT-2 inhibitor should also see sales pick up soon, assuming the FDA expands its label for a new cardiovascular indication on its PDUFA date of Dec. 4.
Typically, stocks don't perform well in the three months after they release disappointing earnings, so Lilly is risky right now. But the company also has a huge, rapidly approaching catalyst in Alzheimer's drug Solanezumab, which should see phase 3 trial data this quarter. It's a stock to watch closely, and high-risk players might want to take a chance because of the massive swing factor in Solanezumab.
With the presidential election dominating the news, market enthusiasm for pharma has chilled to Ice Age levels. In fact, biotech investors may be approaching panic, with the Nasdaq Biotechnology Index down 9% over the past month.
Just remember: Panicking never made anyone a dime in the stock market. Pharma can be a tricky industry, but concern over drug-price reform will probably die down after the election, especially since Congress thus far has chosen to pick a few battles within the sector, rather than go after the entire industry with major legislation.
But however the election plays out, these three stocks' reliance on innovation, rather than price-gouging, bodes extremely well for their future. And with investors running away in droves, if you're willing to risk some volatility, they could net you a red-hot deal today, as well as a nice payoff for decades to come.