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2 Top Healthcare Stocks for 2021 and Beyond

By Anirudh Shankar - May 14, 2021 at 6:03AM

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These two companies should be on your radar.

Bristol Myers Squibb (BMY 2.33%) and Merck (MRK 1.24%) are two quintessential blue-chip healthcare stocks. The companies still rest off their all-time highs by almost 15%, and trade at record-low valuations. Both have made some big acquisitions and boast some of the best-selling products on the market. These factors might just drive tremendous growth over the next few years, making today a great time to buy.

Scientists working

Image source: Getty Images.

1. Bristol Myers Squibb

Bristol Myers Squibb, which is almost 150 years old, has shown signs of rejuvenation and a bright future over the last few years. Through acquisitions and intensive research and development (R&D), it has grown its pipeline tremendously and now has a new set of drugs ready to take the market by storm.

Its two most recent acquisitions, Celgene and MyoKardia, have equipped the company with the resources needed to compete with other major players in the pharmaceutical space. Its first-quarter 2021 earnings were very promising, with $11.1 billion in sales, up 3% from 2020.

Bristol Myers also saw great developments for some of the top drugs currently in its pipeline. It's getting positive data to treat new types of tumors using the cancer drug, Opdivo, as well as encouraging news in its hematology business with approvals to treat certain indications using Breyanzi. The company also saw positive results in its immunology business to treat multiple indications with Mavacamten, which is still under review by the U.S. Food and Drug Administration (FDA).  

The quarter also included notable gains for Eliquis (a blood clot treatment), Orencia (for autoimmune disease), Pomalyst (for myeloma), and Yervoy (for skin cancer), which were up 9%, 6%, 8%, and 15%, year over year respectively. These four drugs combined brought in $5 billion in sales. The company's main focus was expanding sales for its popular drug, Eliquis, which management expects to deliver significant growth over the next several years.

A point of hesitancy for investors was the debt taken on in the Celgene and MyoKardia acquisitions. Bristol Myers currently holds $13.2 billion in cash with around $46.3 billion in debt. It has also announced the completion of almost $4 billion in debt reduction in the past year, and commits to continually cut debt levels to maintain a strong investment-grade credit rating.

With several strong drugs on the market and additional ones in its pipeline, Bristol Myers Squibb is looking like an attractive business to own not just in 2021, but in the years to come. 

2. Merck

After 130 years, Merck is also showing no signs of slowing down. The company currently has the second-best-selling drug in the world, right behind AbbVie's Humira. Analysts project Keytruda to overtake it in global sales by 2023, due to the patent cliffs that Humira is facing.

Keytruda did $14.4 billion in sales in 2020, and the company only expects that number to grow. Analysts project that by 2025, Keytruda sales will hit $22.5 billion annually, up 56% from what sales of Keytruda did in 2020 . Merck also reported first-quarter earnings recently, providing a very promising 2021 financial outlook, with annual sales growth of about 8%.

Merck has been making great strides to expand Keytruda into new indications. It has announced several approvals in both the U.S. and EU to treat multiple types of cancer. The company also has entered into an agreement with Gilead Sciences, taking therapeutics from both companies and co-developing them to create treatments for HIV. In addition to this, Merck acquired Pandion Therapeutics on April 1 in an effort expand its pipeline to treat autoimmune diseases.

The mergers and acquisitions combined with its R&D are going to be huge growth drivers for a company that has struggled to boost sales the past few years. Merck has only been able to grow revenue at 3.73% per year for the last five years. But in the first quarter, Keytruda's sales shot up by 19% year over year, while other drugs such as Bridion and Lynparza grew by 14% and 57%, respectively. Merck still has plenty of potential with some of its leading drugs, and investors should take advantage. 

The time to buy is now

Bristol Myers Squibb and Merck are trading at extremely cheap valuations. Bristol Myers' management recently hinted to investors that shares might be undervalued by announcing a $3 billion to $4 billion buyback program. So now could be an opportune time to pick up shares. Bristol Myers Squibb currently trades for about 8.5 times forward earnings, down from around 10 a few months ago. Taking EPS estimates for next year of around $8.04, a return to fair value would be about an $80 share price -- meaning a 20% or more return for investors, not to mention the 2.9% dividend yield being offered while you wait.

Merck seems undervalued as well, trading at a 12.2 forward P/E ratio, down from 14.4 just a few months back. Taking a $7.11 EPS estimate for next year and a return to normal valuation could mean a $100 stock price, a stellar 22% return for investors over time once the stock returns to fair value. Merck offers a nicer dividend yield than Bristol Myers, at around 3.22%. 

Both Bristol Myers Squibb and Merck have been increasing their dividend for some time now, growing their payouts by 9.3% and 9.73%, respectively, over the past year. Buying and holding these stocks will provide investors with possible market-beating returns in share price and dividends for the next few years. 

Anirudh Shankar owns shares of AbbVie, Bristol Myers Squibb, and Merck & Co. The Motley Fool owns shares of and recommends Bristol Myers Squibb and Gilead Sciences. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Bristol Myers Squibb Company Stock Quote
Bristol Myers Squibb Company
$73.80 (2.33%) $1.68
Merck & Co., Inc. Stock Quote
Merck & Co., Inc.
$88.49 (1.24%) $1.08

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