For investors new to the health-care sector, identifying the top stock picks in Big Pharma can be a daunting proposition. With all the blockbuster drugs on the market from the biggest pharmaceutical players in the business, which deserve your investment?
Fortunately, long-term investors have a clear goal in mind: buying great stocks to grow over the course of several years. Let's look at three pharmaceutical stock picks leading the charge into a bright future, boasting promising drug pipelines, solid footholds in fighting demanding diseases, and dividends and security for the long haul.
Focusing on what works: Pfizer
Pfizer (NYSE:PFE) is one of the most recognizable Big Pharma companies out there, but this stock's no slouch. It's rewarded investors with a gain of nearly 28% over the past year. But past results are no indicator of future performance. Can Pfizer keep up its gains over the long run?
It certainly has the potential to. The company's leadership has refocused the company around its core pharmaceutical niche, selling off its infant-nutrition business to Nestle and spinning off its animal-health business, Zoetis. While diversification is good for many companies, Pfizer's powerful pipeline and current portfolio of drugs will help it keep margins high while focusing all its efforts on developing top blockbuster drugs for the long term.
Pfizer has lost sales because of the patent cliff recently -- its former top-selling drug Lipitor has seen sales fall sharply in recent quarters -- but other of the company's leading drugs have plenty of longevity. Recently approved blood thinner Eliquis, which some analysts have pegged for peak sales of $4.2 billion, won't lose patent protection until 2023, with other leading drugs, such as Xeljanz and Xalkori, also holding on to patent protection past 2020. It's a strong foundation Pfizer can build around as it advances its pipeline, which boasts of more than 20 drugs in or beyond phase 3 trials. Not all of those drugs will work out for investors, but Pfizer will hit on some -- providing much-needed revenue punch for years to come.
Pfizer's also a strong dividend stock, with a 3.3% dividend yield, a low and sustainable payout ratio, and a strong recent history of raising its dividend. While Pfizer will have to contend with further patent-related sales losses in the coming years, this is one stock set to continue its dominance in the pharmaceutical industry for the foreseeable future.
Delivering the right dividend: GlaxoSmithKline
Speaking of dividend stocks, GlaxoSmithKline (NYSE:GSK) is one of Big Pharma's best stock picks for income investors. The stock's already among the highest-paying in the industry, with a 4.2% dividend yield, but Glaxo has the financial strength and commitment to back up that lofty dividend.
Glaxo's become one of Big Pharma's best overseas, expanding its reach around the globe to take advantage of emerging-market growth. The company already gains around 26% of its total sales from emerging markets and the Asia-Pacific region, and no one geographical segment at Glaxo generates more than the 32% of total sales earned in the United States. That kind of worldly diversity is a big boost in an age where health care in advanced economies such as Europe and America is under serious budget pressure. Developing nations such as China and India are poised to launch a health-care bonanza, and Glaxo will be right on the front line to take advantage.
This company has a huge load of compounds either already submitted for regulatory approval or undergoing phase 3 trials, making Glaxo's current struggles with patent expirations look short-lived. Glaxo also recently landed an FDA approval for COPD drug Breo, along with partner Theravance (NASDAQ:THRX), giving these two firms a foothold in treating one of America's deadliest diseases. Peak sales estimates project that Breo could earn up to $2.4 billion annually for Glaxo and Theravance, making this one of probably multiple blockbusters to watch for the former's future.
The foundation stock: Johnson & Johnson
It's tough to call a diversified medical stock like Johnson & Johnson (NYSE:JNJ) a "pharmaceutical" pick, but make no mistake: J&J dominates the business of drugmaking, and this is one pick that should anchor any portfolio -- health care-oriented or not.
Johnson & Johnson's facing patent expirations that could hurt sales soon: Notably, immunology blockbuster Remicade, which gained more than $6 billion in sales last year, will lose its European protection in 2015. Still, J&J has plenty of developing drugs to replace and gain upon lost sales. Newly approved diabetes medication Invokana has already proven to hold a few advantages over Merck's (NYSE:MRK) megablockbuster drug Januvia. While Invokana won't take down Merck's $5.7 billion that it gained from Januvia last year, this drug is well positioned to capitalize on diabetes' rise to keep J&J's sales chugging. J&J also boasts other developmental drugs for diabetes, tuberculosis, and other diseases that look promising, as well as already on-the-market drugs, such as oncology medication Zytiga, that have gotten off to fast starts and promise years of top sales to come.
J&J's real strength as an anchor for your portfolio is in its diversity, however. This is a stock that can take a hit and keep coming. Its strong portfolio of drugs, as well as its dominant position in medical devices and consumer-health products, makes J&J the safest pick in health care and a stock you can rely on for years -- or even decades. J&J's hopeful that new pharmaceutical products can make up 50% of total drug sales by 2017, something that should keep its pharmaceutical business on top for a long time to come.
Look for the long term
Pharmaceutical stocks can be feisty picks between regulatory approvals and patent losses. Still, Pfizer, Glaxo, and J&J have all maneuvered into top positions for many years, with bountiful pipelines of drugs and strong financial outlooks. These are three picks that any health-care investor could do well picking up.
Fool contributor Dan Carroll has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.