On balance, healthcare stocks have been on the upswing for the better part of the last five consecutive years. Even so, this group as a whole still has a lot of room to run based on the growing demand for healthcare services both domestic and abroad.
So with the healthcare sector's strong growth prospects in mind, we asked three of our contributors which stocks might be great buys for savvy investors right now. They recommended Amarin Corp. (AMRN -4.09%), CVS Health (CVS 0.78%), and Celgene (CELG). Read on to find out why.
This small-cap biopharma has explosive upside potential
George Budwell (Amarin Corp.): Amarin is barreling toward the moment of truth for its prescription fish oil pill Vascepa right now, and that could be great news for investors. Specifically, the company expects to wrap up the second pre-specified interim efficacy and safety analysis for the ongoing cardiovascular outcomes trial called REDUCE-IT by the third-quarter of this year. So Vascepa's long-awaited cardiovascular outcome results will be known by no later than mid-2018, and perhaps before year's end.
Why is this ongoing trial so critical? If positive, Vascepa's target market would grow from a couple of million patients with high triglycerides to possibly tens of millions in just the United States alone. Put bluntly, Amarin might be developing a drug with the potential to generate upwards of $2 billion in peak sales. And for a company with a market cap of right about $800 million at the moment, this multi-billion dollar commercial opportunity certainly qualifies as an attractive value proposition, to put it mildly.
The big picture is that Amarin might have an honest to goodness franchise level drug on its hands that would open up several other avenues for value creation in the next few years. Amarin may choose to simply put itself up for sale, or use its growing free cash flows to expand its portfolio through an acquisition. Either way, early investors would probably be in for a sizable return on capital.
Unfortunately, Amarin's fate is going to be closely tied to REDUCE-IT's final outcome, and there's no sure thing when it comes to clinical trials. So this all-or-nothing pharma stock certainly isn't for the faint of heart. But savvy investors may want to grab at least a few shares ahead of this pivotal catalyst in the event that Vascepa does turn out to be an important part of the cardiovascular care landscape moving forward.
Flip the "script"
Sean Williams (CVS Health): Savvy healthcare investors are probably keeping a very close eye on CVS Health, the largest pharmacy operator in the country by market share. Though the company has run into a bit of a rough patch in 2017, its recent swoon could be the perfect opportunity for healthcare investors to swoop in.
As noted in the company's first-quarter earnings report earlier this month, pharmacy same-store sales declined by 4.7%, and front-end sales fell 4.9% on a same-store basis. Front-end sales have struggled as promotional discounting has slowed and foot traffic has dipped. As for pharmacy weakness, nearly all of it can be traced to the loss of its dispensing contract with Tricare, the U.S. Department of Defense healthcare program, to rival Walgreens Boots Alliance.
While this weakness can't be swept under the rug, there are plenty of long-term positive takeaways. For instance, the company's generic pharmacy operations appear primed to deliver substantial long-run growth. Higher generic dispensing does hurt the company's overall sales since generics are priced far lower than branded medicines, but CVS can actually generate better margins from generic medicines due to their low costs. According to the IMS Institute for Healthcare Informatics, generic drug growth is expected to increase from roughly 88% of prescriptions filled to between 91% and 92% by 2020. Though this could pressure CVS' pharmacy top-line, it should result in more robust pharmacy service margins for the company.
At the same time as we're witnessing a push toward generics, we're also seeing the aging of America. The U.S. Census Bureau is estimating that the population aged 65 and up will essentially double between 2016 and 2050. Elderly Americans typically require more maintenance therapies, which bodes well for the largest pharmacy by market share in the country.
I'd also suggest not worrying too much about front-end sales, given that consumer buying habits can change at the drop of a dime. Reduced promotional activity will likely soon be overlooked by consumers.
With high single-digit EPS growth expected through the remainder of this decade and perhaps into the 2020s, CVS Health's recent hiccup could be the perfect opportunity for savvy healthcare investors to dip their toes into the water.
This biotech giant is still in growth mode
Brian Feroldi (Celgene): Savvy healthcare investors know that they need to anchor their portfolios with companies that gush cash and have strong growth prospects ahead. Those criteria perfectly describe Celgene, which is why I think so highly of this stock.
Celgene's long-term success is centered around the blood cancer drug Revlimid. Celgene rang up $1.9 billion in sales of Revlimid last quarter, making it one of the top-selling drug in the world. Better yet, Revlimid's sales increased by 20% year-over-year, which is an impressive result given that this drug has been on the market for several years.
Looking beyond Revlimid, Celgene has a number of other fast-growing drugs that are powering revenue and profits higher. That list includes drugs such as the blood cancer drug Pomalyst/Imnovid, the autoimmune disease drug Otezla, and the pancreatic cancer drug Abraxane. In total, Celgene's portfolio of products is expected to pull in more than $13 billion in total sales this year, which represents double-digit growth.
That's all great, but the real reason I like Celgene so much is that the company isn't shy about investing in its future. Celgene boasts dozens of internally developed and partner products in its pipeline. The one that excites me the most is ozanimod. This drug candidate is in late-stage trials for treating several autoimmune diseases. Many market watchers believe that ozanimod could easily reach blockbuster status.
In total, Celgene offers investors both near and long-term growth potential. That's an attractive combination for a company that is only trading around 14 times next year's earnings estimates.