3 Pharmaceuticals to Profit on Obamacare

by Susan J. Aluise | April 16, 2014 11:34 am

Although the political battles over the Affordable Care Act (ACA) will not end anytime soon, one thing is certain: More people with health insurance coverage translates into higher sales of prescription medicines and other innovative treatments, and that’s good news for pharmaceuticals.

Source: Flickr[1]

Pharmaceuticals are attractive even independent of ACA concerns, thanks to their size and stability, not to mention dividends.

Even before Obamacare’s individual mandate took effect, total spending on medicines in the U.S. rose 4.2% to $329.2 billion last year, according to a study on medicine use and healthcare costs[2] released by the IMS Institute for Healthcare Informatics this week.

Factors driving the growth included drug price increases, greater use of the healthcare system, higher spending on new medicines and a reduction in the impact of patent expirations. And transformations in disease treatment will continue to be a game changer for Big Pharma companies. The IMS study noted that these new offerings promise fewer doctor visits and hospitalizations, better outcomes and reduced use of long-term care facilities – all objectives of Obamacare.

In a global medicine market that IMS predicts will break the $1 trillion sales threshold this year, investors looking for growth and income can find a lot of ways to play the sector. When it comes to pharmaceuticals, I like large, stable companies with strong pipelines and a dividend yield of at least 2.7%. Pharmaceuticals that have been roughed up by the market in recent weeks are an added value.

That said, here are three pharmaceuticals to cash in on Obamacare and other industry trends:

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Johnson & Johnson (JNJ)

pharmaceuticals-jnj-stockMarket Cap: $280 billion
Current Dividend Yield: 2.7%

If you’re looking for pharmaceuticals that have taken their share of lumps over the past few years, Johnson & Johnson (JNJ[4]) must be near the top of your list.

Massive quality-control problems in products ranging from common over-the-counter medications such as Tylenol, Benadryl and Motrin to high failure rates in hip prostheses and recalls of insulin syringes have weighed on JNJ stock since 2009, triggering thousands of lawsuits and a tarnished reputation.

But CEO Alex Gorsky is working to revive JNJ’s fortunes and reputation[5], settling lawsuits and moving the company forward. JNJ’s quarterly earnings of $1.54 a share, which it reported on Tuesday, easily beat Wall Street’s expected $1.48 EPS. Revenue for the quarter was $18.11 billion, a hair above analysts’ expected $18 billion.

JNJ has a well-diversified product line and strong international sales; the company’s drug pipeline includes innovative treatments like Vokanamet for Type 2 diabetes. Last month, JNJ announced its’ Janssen Pharmaceuticals unit would team with biotech startup Alector[6] on Alzheimer’s treatments.

JNJ had a tough start to 2014, dropping nearly 9% between Jan. 17 and Feb. 4, but JNJ stock has rebounded nicely since then, gaining more than 8% since early March.

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Sanofi (SNY)

pharmaceuticals-sny-stockMarket Cap: $137 billion
Current Dividend Yield: 3.7%

Patent expirations have been a real problem for pharmaceuticals in recent years — and Paris-based Sanofi (SNY[7]) has felt its share of pain on that front, particularly after its clot-busting drug Plavix went off patent two years ago.

More recently, the FDA delayed the launch of SNY’s multiple-sclerosis drug Lemtrada; the company plans to resubmit that application in the second quarter. That said, SNY’s blockbuster diabetes drug Lantus racked up $7.5 billion in sales last year alone and sales have grown by double-digit rates over the past couple of years.

Although Sanofi faces a patent cliff on the drug as early as next year, U300 is in late-stage clinical trials and has demonstrated even greater success in controlling blood sugar levels — particularly at night. SNY also is making a major play for emerging markets: most notably Africa[8].

Sanofi already has had a rough start to 2014, losing nearly 11% between Jan.1 and Feb. 6.  Although the stock has recovered that lost ground in the past seven weeks, SNY still looks affordable, trading at just 13 times forward earnings.

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Bristol-Myers Squibb (BMY)


Market Cap: $81 billion
Current Dividend Yield: 2.9%

According to the latest Express Scripts Drug Trend Report released last week, Hepatitis C treatments are projected to grow by 100%[9] this year — and by 200% in each of the next two years.

That’s one great reason why pharmaceuticals like Bristol-Myers Squibb (BMY[10]) are challenging Gilead Sciences’ (GILD[11]) powerful Hep C franchise. It didn’t hurt BMY that the FDA gave its combination daclatasvir (DCV) and asunaprevir (ASV) drug its “breakthrough therapy designation”[12] in February.

BMY also is raising the ante in its HIV franchise: last week, it submitted a new drug application to the FDA for a fixed-dose combination of atazanavir sulfate and a boosting agent known as cobicistat that can increase the level of certain HIV-1 medicines in the blood and make them more effective. If approved, atazanavir sulfate and cobicistat could offer patients living with HIV-1 a single tablet that eliminates the need to take a boosting agent in a separate tablet.

BMY shares are down 8% so far this year, and although its forward P/E of nearly 29 doesn’t look cheap, I still rank it a buy now for the growth prospects and the stability. BMY has a beta of only 0.36 — that indicates it is 64% less volatile than the broader market.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.

  1. Flickr: http://www.flickr.com/photos/35987702@N03/
  2. a study on medicine use and healthcare costs: http://www.imshealth.com/portal/site/imshealth/menuitem.c76283e8bf81e98f53c753c71ad8c22a/?vgnextoid=d58b8b5776165410VgnVCM10000076192ca2RCRD&vgnextchannel=ba11e590cb4dc310VgnVCM100000a48d2ca2RCRD&vgnextfmt=default
  3. Compare Brokers: https://investorplace.com/options-trading/broker-center/
  4. JNJ: http://studio-5.financialcontent.com/investplace/quote?Symbol=JNJ
  5. working to revive JNJ’s fortunes and reputation: https://investorplace.com/2013/11/jnj-finally-moved-past-quality-control-woes/
  6. team with biotech startup Alector: http://www.sfgate.com/business/article/Johnson-amp-Johnson-Alector-team-up-on-5304889.php
  7. SNY: http://studio-5.financialcontent.com/investplace/quote?Symbol=SNY
  8. Africa: http://www.fiercepharma.com/story/sanofi-ceo-vows-go-beyond-handouts-hit-double-digit-growth-africa/2014-04-03
  9. grow by 100%: http://lab.express-scripts.com/drug-trend-report/introduction/year-in-review
  10. BMY: http://studio-5.financialcontent.com/investplace/quote?Symbol=BMY
  11. GILD: http://studio-5.financialcontent.com/investplace/quote?Symbol=GILD
  12. “breakthrough therapy designation”: http://www.foxbusiness.com/industries/2014/02/24/fda-gives-bristol-myers-hepatitis-drug-breakthrough-designation/

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