The pharmaceutical sector delivers two benefits that appeal to investors: reasonable P/E ratios and growth catalysts. Many pharma stocks have suffered as of late. Some have key drugs facing patent expirations. Meanwhile, others have sold off as trade-related fears or regulatory hurdles both domestically and abroad increase uncertainty.
However, some of these companies have responded by developing new drugs. Others trade at attractive valuations due to the uncertainty. Moreover, they benefit from 10,000 baby boomers a day aging into Medicare. This demographic trend increases demand and provides Medicare recipients with a subsidy enabling the purchase of more drugs.
The following five pharma stocks appear particularly well-positioned to benefit from new drugs and demographic tailwinds in 2019:
AbbVie (NYSE:ABBV) has sold off in recent months as concerns about losing the patent on Humira and trade-war worries weighed on the stock. However, thanks to the decline, ABBV has become one of the more reasonably-priced pharma stocks. It trades at slightly more than 10 times consensus estimates for this year. Moreover, the company has replaced Humira with new drugs that treat conditions such as cancer and hepatitis C. As a result, investors will enjoy a 42% increase in profits this year and 9% the next.
ABBV stock trades at about $90 per share at the time of this writing. Nobody knows how long it will take to reach and surpass the all-time high of $125.86 per share. However, thanks to its history as part of Abbott Laboratories (NYSE:ABT), AbbVie holds a 45-year track record of dividend increases, despite the existence of AbbVie itself going back only five years. The current annual payout of $4.28 per share yields about 4.85%. With this kind of profit growth, investors can likely expect an increase next year and in years to come. Hence, even if stock price growth does not return quickly, investors can still profit from a growing dividend.
Still, with the low multiple, the question becomes when and not if stock price growth will return. Once it returns, ABBV stockholders will benefit from not only a healthy income stream but also stock price growth.
Biogen Inc. (BIIB)
Biogen (NASDAQ:BIIB) has become one of the biggest success stories for pharma stocks in recent years. BIIB stock traded below $1 per share as late as the mid-1990s. However, in 2003, a merger made BIIB the third largest biotech company in the world. A number of successful drugs have cemented BIIB as the large-cap pharma stock it is today. Multiple sclerosis treatments have served as Biogen’s focus from the beginning. And that happens to be the focus of its current best-selling drug Tecfidera. However, most of the current growth surrounds a newer drug, Spinraza. Investors should note that the company produces treatments for other treatments such as leukemia, spinal muscular atrophy and hemophilia.
While its almost $330 per share price may show its meteoric rise over time, BIIB stock has fallen about 18% from its July high. As a result, it trades at less than 12.5 times consensus 2018 estimates. Even though consensus profit growth will fall into the single digits next year, Wall Street predicts net income increases averaging just under 8% per year over the next five years. Given the low valuation and the growth coming from Spinraza and other drugs in the pipeline, BIIB stock should recover and resume its long-term march higher.
Celgene Corporation (CELG)
Celgene (NASDAQ:CELG) focuses on developing drugs for both cancer and immunological diseases. Otezla and Abraxane constitute some of its better-known drugs. However, Revlimid, a treatment for a type of blood cancer, currently drives the majority of the company’s revenues.
Unfortunately for shareholders, the U.S. patent on Revlimid expires in 2022. CELG continues to develop and release new treatments. However, last year they botched a regulatory filing, and investors have not trusted CELG stock since.
As a result, CELG trades at levels first seen in 2013. For the last 14 months, the stock has experienced a steady decline — from $147 to $71.
Despite the negative sentiment, the fundamentals may soon form their own positive catalyst. At a forward P/E ratio around 6.7, CELG stands as one of the cheapest pharma stocks. Analysts also believe profits will grow by 18.1% this year and 17.7% the next. Wall Street predicts these double-digit increases will continue through at least 2021.
Admittedly, losing Revlimid rightly creates high levels of uncertainty. But investors should remember that the company still has four years to replace this lost revenue source. Moreover, the fact that one can buy double-digit profit growth for less than seven times earnings creates a compelling value proposition.
Johnson & Johnson (JNJ)
The public knows Johnson & Johnson (NYSE:JNJ) best for its consumer products. However, the company stands out among pharma stocks as it derives just over 50% of its revenues from its pharma division. The majority of JNJ’s drugs focus on immunology, neuroscience, infectious diseases and oncology.
From a financial standpoint, JNJ stock remains one of the most highly regarded in the world. It holds the coveted AAA credit rating. Currently, only JNJ and Microsoft (NASDAQ:MSFT) maintain this designation. This stability allows the stock to trade at a forward multiple of just under 17. Wall Street forecasts 11.8% profit growth this year and 5.6% the next. While this makes JNJ stock somewhat more expensive than some, its valuation remains reasonable. Also, its decades-long history of stability makes a somewhat higher expense worthwhile.
Nothing reflects this stability better than the dividend. This year’s dividend has paid shareholders $3.60 per share, a yield of just under 2.5%. JNJ has hiked this payout every year since 1963. With the stock’s stability and continued growth, stockholders can safely expect the increases to continue. With the rising dividend, the AAA credit rating, and a reasonable valuation, no other equity in the pharma sector tops JNJ stock for both stability and reliable returns.
Pfizer Inc. (PFE)
Over the past six months, Pfizer (NYSE:PFE) stock price has done something it hadn’t done in years: move higher. PFE spent years mired in a trading range. Now it has finally broken out of that range, and it could finally deliver the growth which investors have long waited. PFE stock also appears positioned to return to the all-time high achieved 19 years ago.
The equity had suffered as it lost its Viagra patent and faces patent expiration on Lyrica. However, Eliquis, Ibrance, and other treatments appear poised to pick up the slack. As a result, PFE stock has seen its value rise.
That said, new buyers can still benefit. PFE stock trades at a forward P/E ratio of about 14.4. Analysts also expect profits to grow by 13.65% this year. Although that could slow next year, net income should see high-single-digit increases on average.
Pfizer has also built a reputation for its rising dividend. The current dividend yield stands at just over 3%. Moreover, its $1.36 per share annual dividend has increased every year since 2010. Hence, the streak has persisted long enough that investors can expect yearly dividend increases. Also, with new drugs selling well, certainty has returned, and PFE stock has finally begun to move higher. As a result, Pfizer has become one of the pharma stocks that delivers on both growth and income.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.