Investors favor the healthcare sector in times of market turbulence because no one chooses when they get sick. That makes the demand for products like drugs, hospitals, and medical devices fairly predictable, and largely immune to economic fluctuations.
Thank irrational Mr. Market for this great buy
Keith Speights (Celgene): In his classic book The Intelligent Investor, Benjamin Graham introduced "Mr. Market," an allegorical figure representing the stock market. Mr. Market is sometimes irrationally pessimistic, and offers stocks at a bargain price. Even though Graham wrote his book in 1949, his description of Mr. Market is still applicable today, and I can't think of a clearer target of the character's misguided negativity right now than Celgene.
Celgene markets the second-best-selling drug in the world, Revlimid. Sales continue to grow for the blood cancer treatment, and Celgene should maintain patent exclusivity for it at least through 2022. Even after that, it's likely that Revlimid will contribute significant revenue to the biotech.
Celgene also has two other fast-growing blockbuster drugs in its lineup: Pomalyst and Otezla. Cancer drug Abraxane is knocking on the door of the $1 billion sales level. And the biotech's newest approved drug, Idhifa, could eventually hit peak annual sales in the ballpark of $500 million. Then there's Celgene's pipeline, which includes a number of potential blockbusters, including ozanimod and luspatercept, along with promising cell therapy JCAR017.
Put all of this together, and Celgene thinks it will grow adjusted earnings per share by 19.5% over the next several years. But the stock trades at less than 9 times expected earnings, with a price/earnings to growth ratio of only 0.54. Celgene is dirt cheap -- and is a great healthcare stock to buy before Mr. Market regains his senses.
A lumbering giant at a reasonable price
Chuck Saletta (Pfizer): Sometimes, the best stock to buy is the lumbering giant that the market is ignoring as if it's past its prime. With pharmaceutical titan Pfizer, that just might be the situation now. Due to the recent expiration of its Viagra patent, well over $1 billion of Pfizer's annual revenue is at risk of evaporating. While such losses of exclusivity are a predictable part of the pharmaceutical business, they still take a painful toll on profitability.
Yet when the market becomes concerned about a company's future, its shares can frequently be purchased cheaply. With a still-strong pipeline of candidate treatments for diabetes, cancer and arthritis, among other illnesses, Pfizer looks capable of generating value for years to come. While nothing's guaranteed in drug development, its track record suggests that some of its pipeline candidates could eventually become the blockbusters that will maintain and grow its revenues.
Investors buying today can pick up Pfizer shares for less than 12 times expected forward earnings. Given that those earnings are anticipated to grow at nearly 7% annualized over the next five or so years, Pfizer stock is trading at a reasonable value for its potential. It's indisputably a top player in the pharmaceutical business, and its valuation makes it worth considering today.
All the pieces are falling into place
Brian Feroldi (Alkermes): One healthcare company that I think is starting to hit its stride is Alkermes. It got its start with a focus on drug delivery, reformulating already-approved drugs for other companies to make them more effective. That business is active today, and it allows the company to earn both manufacturing and royalty revenue from partnerships with companies like Johnson & Johnson and Acorda Therapeutics. While this low-risk business hasn't grown very fast in recent years, it did provide the company with the capital it needed to develop its own drugs.
Alkermes has already crossed the finish line with two wholly owned drugs -- Vivitrol and Aristada. The company's top seller is Vivitrol, which is used to prevent opioid and alcohol abuse. Sales last quarter jumped 22% to $76 million, and the growth shows no signs of slowing. Sales of schizophrenia treatment Aristada are growing much more quickly, and totaled $28 million last quarter.
All told, these businesses have allowed Alkermes to grow at a decent clip in recent years, and even generate a moderate profit. However, the company's pipeline is where a lot of its potential lies.
Alkermes boasts a handful of drugs in development that could bring financial windfalls if everything works out. Among them is a potential treatment for depression that has already been granted Fast Track status with the FDA, and is pending review. What's more, the company recently sold another late-stage pipeline drug to Biogen that could generate hundreds of millions of dollars in revenue for the company if it gets the green light from regulators.
All in all, this company offers investors a stable manufacturing business with several potential growth kickers. With its operating leverage starting to start kick in, I think that Alkermes' is a great stock for biotech investors to check out today.