This year the stock market has been on nothing short of a roller coaster ride. The S&P 500 has seen dramatic lows and dizzying highs. On March 23, the index recorded its fastest-ever 30% drop in just 22 trading days. Then, on Dec. 31, it reached a record high of 3,760.
In such unpredictable times, investors find it difficult to distinguish been potential winners and losers. If you are looking for reasonably priced stocks poised for a solid long-term growth trajectory in 2021, then you're at the right place. It will take only $1,000 in disposable cash, and you could get rich by investing in these two top-notch healthcare stocks.
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1. AbbVie
AbbVie (ABBV 0.72%) offers a solid combination of robust growth prospects and steady income. The healthcare company is up over 18.5% over the past 12 months, it still sports a solid dividend yield of about 5%.
AbbVie's revenue growth trajectory is closely linked with sales of Humira. This immunosuppressant drug has clocked revenue of $14.7 billion so far this year, almost half of AbbVie's $31.9 billion total revenue. Humira's sales are expected to be close to $20 billion for the whole year 2020. Investors, however, are concerned about Humira's upcoming loss of exclusivity (LOE) in the U.S. and subsequent biosimilar competition starting in 2023.
Although Humira is expected to remain a solid growth driver for AbbVie all the way until its U.S. LOE, AbbVie has also been preparing for a post-Humira world for some time now. The company's next-generation immunology drugs, Rinvoq and Skyrizi, are expected to earn $15 billion in combined risk-adjusted sales by 2025, thereby offsetting much of the impact of Humira's biosimilar erosion. Besides, the company has also built a robust blood cancer portfolio comprised of Venclexta and Imbruvica, expected to rake in over $6.5 billion in sales in 2020. AbbVie has also developed a broad neurosciences portfolio targeting Parkinson's disease, migraine, and other neuropsychiatric conditions, with annual revenue potential close to $5 billion by 2025.
With the acquisition of Allergan, AbbVie has expanded in the field of aesthetics and neurology. The deal is expected to be 12% accretive to AbbVie's fiscal 2020 adjusted earnings per share (EPS). Previously, concerns were raised about the AbbVie-Allergan integration, especially amid the financial pressures of the pandemic. However, the combined company has successfully allayed many of these fears by becoming profitable and reporting generally accepted accounting principles (GAAP) EPS of $1.3, a dramatic improvement from the GAAP loss per share of $0.50 reported in the second quarter.
Investors can also take relief in the company's focus on repaying $15 billion to $18 billion of its debt by the end of 2021. This will significantly reduce the company's total debt, which was over $87 billion at end of the third quarter. With operating cash flow over $16 billion in last 12 months and a cash balance of $8 billion at the end of the third quarter, AbbVie is definitely in a position to sustain its dividend policy as well as its long-term growth trajectory.
Despite the many positives, we can still say that AbbVie is very much a bargain stock. The company is trading at just over eight times expected earnings for fiscal 2021. Hence, despite the Humira U.S. LOE risk, AbbVie offers a favorable risk-reward proposition to healthcare investors.
2. Merck
2020 has been pretty challenging for Merck (MRK -0.10%). Concerns about its over-reliance on its leading cancer drug, Keytruda, were exacerbated in February 2020, when the company announced plans to spin off its women's health, legacy brands, and biosimilars businesses into a new entity, Organon. Since Merck will now house only oncology, hospital acute care, vaccines, and animal health segments, the revenue dependence on Keytruda is bound to increase, at least in the short run. Finally, the company has estimated the top-line impact of the pandemic to be around $2.4 billion for fiscal 2020.
Despite these challenges, Merck has guided for a fiscal 2020 revenue of $47.6 billion to $48.6 billion, a year-over-year increase of 2% to 4%. The company has earned $35.5 billion so far this year.
Merck's over-dependence on Keytruda is not that big of an immediate challenge, considering the drug will enjoy patent protection until 2028. The drug is approved in multiple indications and geographies, either as a single agent or in combination with other drugs. Hence, Keytruda's revenues flow from multiple diverse patient pools. Merck's current top-line exposure to Keytruda is around 30%, which is not that high, especially considering that its peer Regeneron (REGN 0.92%) has revenue exposure of over 70% to Eylea, and Vertex Pharmaceuticals (VRTX 1.47%) earns over 60% of its revenue from Trikafta. The divestiture of Organon will also prove to be a net positive for Merck in the long run, since the company is essentially spinning off low-growth assets and choosing to focus on high-growth ones.
Merck has also started playing an active role in the COVID-19 landscape. The company has entered into a $356 million deal with the U.S. government to supply 60,000-100,000 doses of its investigational COVID-19 therapeutic, MK-7110, for treating hospitalized patients with severe COVID-19. The company added MK-7110, previously known as CD24Fc, through a $425 million acquisition of OncoImmune. MK-7110 demonstrated a 50% reduction in the risk of respiratory failure or death in severe or critical COVID-19 patients in a late-stage trial. Although it's not a very big revenue driver, MK-7110 could prove to be a commercially successful asset amid a surge of new COVID-19 cases in the U.S. and Europe, and the emergence of a potentially more contagious coronavirus strain in the U.K. The company is also working on another COVID-19 therapeutic, molnupiravir, in collaboration with privately-owned Ridgeback Biotherapeutics. Merck's COVID-19 vaccine candidates, V590 and V591, are in early-stage clinical trials.
Merck is down 11% over the past 12 months. The stock may see some volatility in the first half of 2021, until the completion of the Organon spinoff. However, its mega-blockbuster Keytruda and its COVID-19 portfolio may help reduce the headline risk associated with the pandemic. The company is trading at a little less than 13 times expected earnings for fiscal 2021, which is not exactly cheap, but still reasonable. For these reasons, I think it will be more than worthwhile for healthcare investors to buy this stock now.
