A Healthy Dose of Vaccine and Pharmaceutical Plays

Covid-19 has rightfully captured the headlines, but drug companies continue to focus on developing cures and treatments for all medical conditions. Several leading investment experts and contributors to MoneyShow.com highlight some favorite stocks and exchange-traded funds and in the biotech and pharmaceutical sector. Rida Morwa, High Dividend Opportunities Tekla Healthcare Investors has been a holding of ours for more than four years, and in April we upgraded it to a Must Own, in the midst of the Covid-19 outbreak. Looking at the closed-end fund's top holdings we still see lots of investments we like. Gilead Sciences has enjoyed recent success with its Remdesivir. Other top holdings like Amgen and Vertex , continue to see an increased demand for their products during this pandemic. Biotechnology is a focus area for HQH representing over 60% of the fund's investments. Pharmaceuticals also make up a significant portion of the fund's portfolio with a 17% share. We continue to think these two areas will see a lot of resources devoted to them both to deal with the current crisis and as future research efforts change in response to this crisis. Note that HQH also invests in promising small emerging biotech companies by funding them. This also opens the door for new medical discoveries, and not just a cure/vaccine for Covid-19. Some investors might wonder if, given the price increases from both the March lows and the beginning of the year, it might be too late to invest in HQH. But looking at the year-to-date total returns (price appreciation plus dividends) vs. the returns based on NAV (NAV appreciation plus dividends), the underlying value of the fund's portfolio has increased more than the market price of HQH. So even though the price has gone higher, an investor is still getting a proportionally more valuable basket of assets due to a higher discount to NAV. Investors are buying all these great healthcare stocks at a discounted price of 13%! So now remains a good time to buy HQH. The dividend policy of HQH is somewhat different. It pays a variable, managed distribution each quarter that's 2% of the NAV at the end of the previous quarter. For example, the NAV on March 31 was used to calculate the distribution amount that was paid out on June 30. So investors get a hefty cash flow distribution each quarter, which can grow as healthcare stocks outperform. Note that, unless you elect otherwise, the distribution is paid out in shares -- more stock of HQH -- and the share issue price is determined about a week before the pay date. So as long as HQH trades at a discount, you will be better off getting paid in shares rather than in cash as you get more of this discounted basket of healthcare stocks. Given the likely distribution increase of $0.48 to be paid in September, now is the time to buy more shares or initiate a position. Tom Hutchinson, Cabot Dividend Investor AbbVie is a cutting-edge company specializing in small molecule drugs. It has grown into the eighth-largest pharmaceutical company in the world, primarily on the strength of its blockbuster biologic autoimmune drug Humira, the world's number-one drug by far with annual sales of about $19 billion. The stock is selling at less than 10 times forward earnings. It's cheap because the blockbuster Humira drug is facing increasing competition and the market has worried that the company won't be able to replace the lost revenues. I believe fears are overblown. The company has one of the very best pipelines of new drugs in development in the industry as well as hugely promising, newly launched drugs. The company believes recently launched cancer drugs Imbruvica and Venclexta can generate $9 billion in annual sales by 2025. It also launched two drugs last year that were rated among the top three launched of the year by EvaluatePharma that AbbVie thinks could bring in $10 billion a year by 2025. To further diversify away from dependence on Humira, AbbVie purchased Ireland-based Allergan for $63 billion last year. The company features blockbuster facial treatment drug Botox. The acquisition will diversify the company away from Humira in the near term while the stellar pipeline gains traction. This is a defensive company that offers value and high yield with a very recession resistant business. But it also offers solid growth in the near term and the enormous tailwind of an aging population longer term. By the way, the stock also yields a stellar 4.7% while you wait for the price to go higher. Founded in 1876, Eli Lilly and Company is a global pharmaceutical giant with $23 billion in annual revenues, 34,000 employees and sales in 120 countries. The stock has been in the news lately for having one of the leading Covid-19 drug candidates. The drug, for both treatment and prevention of Covid-19, is in late-stage trials and is the very first candidate to be tested for the National Institute for Health study. But that's not why I'm buying it. I have no idea what will happen with this Covid drug. I learned long ago never to bet on the fortunes of one potential drug. That's why I like Lilly. It's got lots and lots of potential new drugs. The company spends 25% of sales on R&D every year. The segment employs 23% of the company's workforce and spends $5.5 to $6.0 billion annually. Lilly specializes in developing drugs and treatments for unmet medial indications, where there is a higher chance of FDA approval and higher market share and profit margins. It has a very strong presence in diabetes (Trulicity, Basaglar, Jardiance), oncology (Alimta, Cyramza, Vezenio) and new drugs in immunology (Taltz and Olumiant). Retevmo recently received FDA approval for treatment of lung cancer but also reported very positive Phase 3 results in preventing the recurrence of breast cancer -- a huge problem that could make the drug a blockbuster if it succeeds. The stock popped over 15% on news of the Phase 3 study. Lilly also beat second-quarter earnings forecasts with 26% growth over last year's quarter and raised 2020 guidance by 11% to reflect anticipated 21% earnings growth over 2019. The dividend still yields a measly 1.93%. But there are no significant patent expirations in the years ahead and the company will be able to focus on growing the dividend from here. Lilly is the best of its peers. John Buckingham, The Prudent Speculator Gilead Sciences has been in the news for its antiviral drug Remdesivir, used with surprisingly positive results to treat hospitalized Covid-19 patients. While Remdesivir should remain a major revenue producer in the near-term, GILD turned in a weaker-than-expected second quarter that saw revenue of $5.14 billion come in 3% below projections and adjusted EPS of $1.11 fall well short of the $1.44 forecast. The company blamed its lower sales on fewer healthcare provider visits and generic competitors to some of its products. However, it realized growth in its core HIV business, of which we are fans, and the company increased its overall earnings guidance for 2020, saying it now expects sales of between $23 billion and $25 billion, up from its original estimate of between $21.8 billion and $22.2 billion. Gilead expects adjusted EPS of between $6.25 and $7.65, up from its earlier estimate of between $6.05 and $6.45. Not surprisingly, we like that GILD trades for less than 10 times estimated earnings and yields 3.9%. Bruce Kaser, Cabot Undervalued Stocks Advisor Bristol-Myers Squibb Company is a global biopharmaceutical company. Following its controversial acquisition of Celgene for $74 billion in November 2019, the merged company markets a long list of pharmaceuticals, including Revlimid, Eliquis and Opdivo, which treat cardiovascular, oncology and immunological diseases. Bristol-Myers' financial priorities include debt repayment, investment in innovation, share repurchases and annual dividend increases. The company reported good-enough second quarter results with adjusted per share earnings of $1.63, which were 38% higher than a year ago. Earnings were about 10% higher than consensus estimates. Bristol-Myers raised their full-year earnings guidance by 6 cents, or about 1%, which is so small as to be irrelevant -- but at least it was in the right direction. Management commentary pointed to improved growth prospects in 2021. While debt remains essentially unchanged since year-end, the cash balance has increased to $22 billion from $16 billion, reflecting strong cash generation. This cash flow is an important part of the Bristol-Myers story, particularly with the shares trading at a low 8.5x estimated 2021 earnings of $7.40. Recently, the company's Opdivo cancer treatment showed promising clinical study results and was also approved for certain uses in Canada. The shares provide a generous 2.8% yield, well-covered by its enormous $13.5 billion in free cash flow likely this year. I rate the stock a a strong buy. Jim Woods, Successful Investing Right now, the markets are optimistic about science discovering a vaccine, and that's for good reason. We now have multiple companies in each of the various phases of clinical trials (Phase 1, II and III). Large health care and medical products makers such as Johnson & Johnson and Pfizer are two of the biggest players here, but the real excitement is with companies such as Moderna , AstraZeneca PLC , GlaxoSmithKline PLC , Novavax and Inovio Pharmaceuticals . Each of these companies has a vaccine/treatment in one or more clinical trial phases. And while no treatment is ready to be deployed just yet, the eager anticipation of a product coming to market is a trend I think we can benefit from in our Tactical Trends portfolio. Call it a vaccine trade, or a Covid-19 trade, or just smart ownership of a basket of pharmaceutical stocks likely to surge on any positive vaccine news. Whatever you call it, the time has come to gain exposure to this game-changing segment of the market. That's why we recommended that you buy the VanEck Pharmaceutical ETF . This index fund seeks to own the 25 largest U.S.-listed pharmaceutical stocks and has been in existence since 2011. What sets PPH apart from its peer group is that it includes both U.S.-domiciled companies and foreign stocks trading as American Depository Receipts on U.S. exchanges. Most funds just target U.S. stocks and thus will overlook foreign developed companies. The result is that we get a globally diversified basket of the best-of-breed Covid-19 vaccine stocks, including significant allocations to AZN, JNJ, PFE, GSK and many more. Each of these stocks represents roughly 5% of the total PPH basket and the weighted average market cap of the underlying holdings is $102 billion. The top country dispersion in this fund includes a 63% allocation to the United States, followed by the United Kingdom (11.6%), Switzerland (5%), France (5%) and Israel (4.7%). While PPH has seen a big run higher since the March lows, it is by no means too overextended. Continued positive sentiment surrounding the development and deployment of a Covid-19 vaccine will almost certainly continue to deliver buyers into PPH, and that will mean much more upside ahead for the stocks in this fund.

A Healthy Dose of Vaccine and Pharmaceutical Plays

6 favorite stocks and ETFs in the biotech and pharmaceutical sector, including a diversified basket of Covid-19 vaccine names.

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