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2 Best Biotech Stocks to Buy Right Now

By Kody Kester – Oct 18, 2021 at 7:30AM

Key Points

  • The S&P 500 has a 1.3% yield, making it difficult for income investors to find quality high-yielding stocks.
  • Merck is making the right moves to prepare for Keytruda's patent cliff near the end of this decade.
  • Amgen is betting big on expanding Otezla, its recently approved lung cancer therapy.

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These dividend stocks provide sustainable and growing dividends, which are nearly triple the S&P 500's yield.

It's no secret that it has progressively become more difficult for investors to find high-yield investments these days. After all, the current 1.3% yield of the S&P 500 isn't that far off the 1.1% yield of the index leading up to the dot-com bubble that occurred two decades ago.

Frothy market valuations can lead income investors astray and into dividend stocks with unsustainable dividends that are often referred to as "yield traps." That's because these investors feel as though they have few options to meet their expenses with dividend income. Well, here are two biotech dividend stocks whose dividends are safe and poised to grow in the years ahead.

Doctor and patient in office.

Image source: Getty Images.

1. Merck

The first biotech stock that income investors should contemplate buying right now is the $200 billion (by market capitalization) Merck (MRK 1.24%). Merck is best known for the second best-selling drug in the world, Keytruda, behind AbbVie's (ABBV 1.44%) immunology drug, Humira. With 17 approved indications in the U.S., Keytruda is the top-selling cancer drug in the world. Analysts expect Keytruda will assume the mantle of the top-selling drug in the world from Humira when the latter loses its exclusivity in the U.S. in 2023. 

That's because Keytruda still has five Phase 3 clinical trials for additional cancer indications ongoing in the U.S. It also has another four Phase 3 clinical trials for additional cancer indications in the European Union. These indications could be yet another huge boost to Keytruda, which already accounted for 36.7% of Merck's $22 billion in first-half sales this year. And since Keytruda is under patent until 2028, Merck has plenty of time to diversify its revenue base to prepare for biosimilar competition against Keytruda.

For one, Merck has fast-growing vaccine and animal health segments that comprised 30.8% of the company's first-half sales this year. Merck's leadership in these two growing industries should contribute to future growth to partially offset Keytruda's eventual patent cliff. Second, Merck recently flexed its nearly $9 billion cash balance to acquire Acceleron Pharma (XLRN) for $11.5 billion. As a result, Merck will own the pulmonary arterial hypertension (PAH) drug known as sotatercept, which is currently in Phase 3 clinical trials. Analysts estimate the drug could reach peak sales of $2 billion annually, which would be a nice boost to Merck's diversification efforts.

Merck also picked up the drug approved to treat patients with anemia known as Reblozyl. Since Acceleron Pharma will receive low- to mid-20% royalty payments from Bristol Myers Squibb (BMY 0.86%) on sales of Reblozyl and analysts expect $2 billion in peak sales , this could add another $500 million to annual sales in the near future. 

Analysts expect Merck's earnings per share (EPS) growth will accelerate to 13% annually over the next five years. This arguably makes the stock a solid value considering it's trading at less than 14 times this year's EPS forecast. As Merck's dividend payout ratio will be in the low-40% range for this year, its market-beating 3.3% dividend yield is safe and likely to grow in the future.

A doctor meets with a patient.

Image source: Getty Images.

2. Amgen

Another biotech stock for investors to check out is the $117 billion (by market cap) Amgen (AMGN 0.32%). Unlike Merck, which is reliant on one drug, Amgen's revenue stream through the first half of this year is more diversified. Amgen's top-selling drug Enbrel (approved to treat plaque psoriasis and various forms of arthritis) made up only 16.6% of the company's $12 billion in total first-half sales this year. And while Enbrel experienced a moderate dip in revenue this year, Amgen has approved drugs and drugs in its pipeline to offset future declines in Enbrel. 

Amgen expects to receive approval later this year from the U.S. Food and Drug Administration (FDA) for a label expansion of its psoriatic arthritis and plaque psoriasis drug, Otezla, into mild to moderate psoriasis. For context, this would be a key approval for Amgen because it would greatly expand the market for Otezla. That's because, with its psoriatic arthritis indication, Otezla is currently only reaching 30% of psoriasis patients who also have psoriatic arthritis.

The company's expectation of an Otezla launch in China soon and a gradual recovery in visits to dermatologists who prescribe Otezla to patients should help sales grow meaningfully from the $1 billion generated in the first half of this year. The FDA also approved Amgen's targeted lung cancer therapy known as Lumakras earlier this year, which Cory Renauer believes has blockbuster potential in its own right.

Amgen has also made a huge bet on biosimilars as part of its future growth ambitions. For instance, Amgen has biosimilar candidates for Johnson & Johnson's (JNJ 0.88%) immunology drug Stelara, Regeneron's (REGN 2.99%) eye injection drug Eylea, and AstraZeneca's (AZN -0.71%) rare disease drug Soliris all in Phase 3 clinical trials. Considering the tens of billions of dollars in sales those three drugs record each year, even a small slice of such a large pie could be a significant boost to Amgen if these biosimilar candidates are eventually approved.

These factors help to explain why analysts are forecasting 6% annual earnings growth from Amgen over the next five years. While this is more moderated growth than Merck, Amgen is trading at less than 13 times this year's average EPS estimate.

And with a payout ratio set to be in the low-40% range for this year, Amgen's dividend should be able to grow in the high single digits in the years to come. Pairing this kind of dividend growth with a 3.4% dividend yield is what makes Amgen an attractive biotech to buy now.

Kody Kester owns shares of AbbVie, Amgen, Bristol Myers Squibb, Johnson & Johnson, and Merck & Co. The Motley Fool owns shares of and recommends Bristol Myers Squibb. The Motley Fool recommends Amgen and Johnson & Johnson. The Motley Fool has a disclosure policy.

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