As investors, it benefits us to pay attention to trends -- particularly those massive trends that have been under way for some time and that are likely to continue.
Arguably one of the best examples is what demographers refer to as the "grey tsunami," which is a term for the large wave of baby boomers in the U.S. who have reached the age of at least 65. The U.S. Census Bureau points out that by 2030, the 73 million living baby boomers as of the 2020 Census will all be 65-plus years of age.
Of course, the older people are, the more they typically require healthcare interventions such as medications and surgeries. These demographic developments therefore matter very much to healthcare companies such as AbbVie (ABBV -0.42%), AstraZeneca (AZN 0.42%), and Viatris, (VTRS -0.72%), all of which I believe are reasonably valued picks for August.
Pharma stock AbbVie has been working very diligently over the past few years to develop its next blockbuster drugs that will offset its loss of exclusivity for the top-selling drug in the world, immunology wonder drug Humira. (Humira lost exclusivity in the EU in 2018 and is set to lose exclusivity in the U.S. in 2023.)
To replace this revenue juggernaut, AbbVie is turning primarily to from its largest segment, which is immunology. The company's immunology revenue through the first half of this year (44.1% of total net revenue) has increased 14% from the same period last year, to $11.86 billion from $10.41 billion.
Approximately a quarter (27.1%) of that $1.46 billion in additional revenue was due to continued growth in Humira's U.S. net sales. But the other three-quarters (72.9%) was derived from increased revenue of AbbVie's other two immunology drugs, Skyrizi and Rinvoq.
The share of the latter two blockbusters' immunology segment revenue doubled from 8.3% in H1 2020 to 16.3% in H1 2021. According to Vice Chairman Mike Severino, AbbVie remains on track to submit regulatory applications to the U.S. Food and Drug Administration (FDA) later this year for Rinvoq in ulcerative colitis and Skyrizi in Crohn's disease. Therefore, the trend of the two next-gen immunology drugs replacing Humira's revenue should continue.
Despite AbbVie's promising fundamentals, at just 3.8 times its trailing-12-month sales, the company is trading below its median historical price-to-sales ratio of 4.1 -- suggesting it's worth a look for value investors. AbbVie also offers a safe 4.6% yield for income investors, well above the S&P 500's current average of just 1.3%.
In buying Alexion, AstraZeneca was able to bolster its existing orphan drug portfolio, which consisted of non-small cell lung cancer drugs Tagrisso and Imfinzi and pancreatic cancer drug Lynparza. Combined, these three generated $8.15 billion in total 2020 sales.
Alexion Pharmaceuticals will contribute two blockbuster drugs (Soliris and Ultomiris) to AstraZeneca's drug lineup, as well as Strensiq, a treatment for a rare genetic disorder called hypophosphatasia. Collectively, these accounted for $5.87 billion in revenue last year. AstraZeneca has noted that only 5% of the 7,000-plus known rare diseases currently have approved treatments from the FDA, meaning there are tremendous unmet needs for those patients.
The Alexion acquisition's help in positioning AstraZeneca as a leader in the orphan drug market is the primary reason analysts are forecasting that the company will grow its earnings by 19% annually over the next five years. Currently, the company is trading at less than 17 times this year's anticipated earnings per share of $3.33. AstraZeneca's price-to-earnings growth or PEG ratio works out to 0.9. Simply put, AstraZeneca provides investors with growth at a reasonable price over at least the next several years. The stock also offers a market-beating yield of 2.5%.
With a growing number of baby boomers requiring expensive prescriptions, it is in the best interests of patients, insurance companies, and government entities alike to encourage the development of safe but cheaper generic and biosimilar medications. Research firm Research and Markets anticipates that the U.S. generic drug industry will grow 5.7% annually from $171.8 billion in 2020 revenue to $239.5 billion by 2026.
Few, if any, companies are better positioned to take advantage of this growth opportunity than generic and biosimilar drug maker Viatris, which was spun off from Pfizer's Upjohn business to combine with Mylan last November.
At just 4 times analysts' average estimate of $3.53 in earnings per share (EPS) for this year, investors would be forgiven for assuming that Viatris is a value trap falling apart fundamentally.And it's true that the company's revenue will remain essentially flat in the near term, with analysts forecasting $17.59 billion in revenue this year and $17.43 billion next year; this is because the launches of new biosimilar drugs such as insulin drug Semglee in the near future are expected to be offset by intense competition for drugs in Viatris' largest product category, which is Brands (60% of its first-half sales).
That said, thanks to Viatris' expected cost synergies of $500 million this year and $1 billion by 2023, its EPS is actually expected to rise 4% to $3.67 next year despite an uninspiring top line. Viatris offers investors an annualized dividend per share of $0.44, or a 2.9% yield. This is more than covered by its EPS, even as the company seeks to repay $6.5 billion in debt through 2023.
Overall, Viatris offers investors a company with relatively stable operating fundamentals and a favorable long-term industry outlook at a cheap valuation.