3 Powerhouse Pharma Stock Favorites

Healthcare is normally considered to be a defensive part of our portfolio; nevertheless, several of these stocks are have turned into true powerhouses, explains growth and income expert Todd Shaver, an industry-leading growth expert, a contributor to MoneyShow and the editor of BullMarket Report. AstraZeneca has been on offense all year long. The stock is up 30% year-to-date, which is excellent for a healthcare company with a market cap of $125 billion. The company has been benefitting from a strong drug pipeline and consistently good news coming from the FDA and the company's testing facilities. Recently, the FDA approved Calquence, a treatment for chronic lymphocytic leukemia in adults. After positive results from two phase-3 clinical trials, which showed that Calquence reduces the risk of disease progression, the drug became one of the first approved under the FDA's new Project Orbis, whereby international partners can review and approve oncology medicines in tandem with the FDA. That means a much faster time-to-market globally for Calquence, which means accelerated top-line for AstraZeneca. The FDA also recently approved a marketing application for Selumetinib, a drug that targets a rare pediatric disorder. AstraZeneca is on a roll here. Meanwhile, type-2 diabetes drug Qtrilmet was approved by the European Commission. Diabetes is a growing problem in the EU, and this drug was approved in the U.S. earlier this year, and is expected to perform well globally. Looking deeper into the drug pipeline, Imfinzi and Farxiga each look like powerhouses in the making. The former achieved positive results from a Phase 3 clinical trial targeting patients with non-small-cell lung cancer. And the latter showed cardiovascular benefits after a Phase 3 clinical trial. So each of these drugs could be major winners for the company down the line. On the financial front, the company had a stellar 3Q19. Revenue of $6.1 billion improved 16% year-over-year, with gross margins increasing by 1% to a very healthy 80%. EPS came in at $0.99, over 40% better than the $0.71 reported during 3Q18. Oncology led the way with sales growth of 50% YoY, including 82% overall sales growth for blockbuster drug Tagrisso, which ballooned in emerging markets, with over 100% year-over-year growth there. On top of all of that, the company is launching a $1 billion fund aimed at investing in Chinese healthcare startups. China is the world's second-biggest market for Healthcare (and growing). The fund is a joint venture between AstraZeneca and China International Capital, and has already raised capital from significant investors like Sequoia Capital. AstraZeneca has so much going for it, it's difficult to pick just one bright spot. All of the FDA approvals and successful trials point to a strong drug pipeline. Tagrisso's $2.3 billion in year-to-date sales, plus Imfinzi's $1 billion+ in year-to-date sales are what's driving current revenue. And with $850 million in sales, Lynparza is on the verge of becoming another blockbuster. The story at Eli Lilly this year has been much different from AstraZeneca. The stock reached an all-time high of $132 back in March, but tumbled after investors grew anxious the stock was overbought. Since the summer, the stock has been on a bumpy ride, but is now creeping back up again during 4Q19, and is back into positive territory (up 13% year-to-date). There are some encouraging stories here, underscored by Taltz, the psoriasis treatment in pediatric patients. 90% of patients in a recent Phase-3 trial achieved at least a 75% improvement, and 80% achieved perfect or near perfect results. That positions the drug as superior to Abbvie's Humira drug, which is a mega-blockbuster. Humira has generated $115 billion in global sales since its launch in 2010. If Taltz can outperform Humira, the sky is the limit for Eli Lilly. The loss of Cialis patent exclusivity clearly hurts. The company's U.S. sales was flat this past quarter at just over $3 billion, which has everything to do with Cialis copycats hitting the market. That said, Trulicity, Taltz, Emgality and others are still going strong, so the loss of Cialis' exclusivity was offset, and didn't create a drop in year-over-year U.S. sales. Total international sales grew 8% year-over-year to $2.4 billion. Trulicity, Taltz, Olumiant and Jardiance are all growing globally, which is lifting overseas sales. On the financial front, 3Q19 was a mixed bag, with revenue of $5.5 billion coming up short of expectations by a mere $20 million. That said, at only a 3% year-over-year gain, we can see why there has been tepid buying from investors. EPS of $1.48 beat market estimates by $0.07, and is up 22% year-over-year. That includes an extra 2% in operating costs this past quarter, thanks to some increased investments in the late-stage drug pipeline. Net income rose nearly 10% to $1.2 billion. All in all, 3Q19 wasn't the best earnings report, thanks to the revenue miss, but not the worst either. Lilly has a lot going for it, including the aforementioned Taltz positive data, the global growth story, as well as U.S. approval for Reyvow, which treats migraines. The company is also investing $400 million into a manufacturing hub in Indianapolis, which will boost capacity for future drug production. While we're not happy with the performance thus far, we are hopeful the stock will continue its upward swing throughout what's left of this year. The 2.2% yield adds a little extra onto your return, but the real story is the future growth potential. Meanwhile, Eli Lilly has pushed back on efforts to turn the company into a scapegoat for decades of shortsighted insulin pricing policies. As management notes, not having generic diabetes products on pharmacy shelves is not Eli Lilly's fault. It's up to the distributors to actually stock the drugs. Top analysts agree with us. Morgan Stanley argues that this company is worth $150 if its total share of the diabetes market swells from $11 billion to $15 billion a year by 2023. Huge numbers. We're looking forward to it, although for now we'll be happy to see Eli Lilly hit our $145 price target before we set our sights higher. Like Eli Lilly, Johnson & Johnson has had an up-and-down year, ultimately landing at a disappointing year-to-date return. Of course the 2.6% yield nearly puts you in double-digits for the year, but we were expecting much more from this Healthcare stalwart. The stock did crack the $140 mark several times over the summer, but has struggled to regain its footing since. We believe the company has enough going for it that the stock can return to that level. A big factor holding it down at the moment is legal risk -- with both the pelvic mesh and opioid claims causing downward pressure on the stock. The company has already agreed to pay out just over $100 million to settle multiple claims throughout the U.S., and just lost another pelvic mesh claim in Australia. Meanwhile the company is on the hook for $465 million in the opioid claim, with potentially more probes and litigation on the way. While no one knows the final cost of all claims, the end result will more than likely be a small part of overall revenue. That said, the market is averse to uncertainty, so any legal risk here will weigh down on the stock in the short term. There's good news in the drug pipeline, where Darzalex was just approved by the European Commission for multiple myeloma treatment in the EU. Additionally, the company is looking to promote its Invokana drug to adults with heart failure. This comes on the heels of blockbuster drug Xarelto winning FDA approval to treat blood clot patients. Xarelto keeps expanding its sales and its reach, with recent FDA approvals expected to add as much as $1.5 billion in annual sales over the coming years. 3Q19 sales of $21 billion reflects 2% year-over-year growth, and while EPS decreased 54% to $0.66, that has everything to do with the aforementioned legal claims, which took a chunk out of earnings. Johnson & Johnson is an industry stalwart, and one of the all-time great American companies. With a dividend as rock-solid as they come, the company represents the ultimate defensive play. In that sense, banking a 10% total return isn't bad, considering the company is much more stable and dependable than most -- even in the healthcare space. That said, we're always looking to beat the broader market's return, and J&J won't accomplish that this year. Regardless, every investor should own a piece of this company, as doing so protects one's downside risk in case of a pullback or recession, and there is plenty of upside once the legal troubles are firmly in the rearview. Learn more about BullMarket Report here.

3 Powerhouse Pharma Stock Favorites

These healthcare stalwarts look attractive for growth and income.

Columnist Conversation

This Weekend on Real Money

Friday Morning Fibocall for 10/22/2021

10-Year Note Yields

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.