Look to pharma sector for top healthcare stocks

Baby boomers may increasingly whine about their creaking bodies.  But a positive side to their groans and moans for healthcare solutions is the growing need for drugs — particularly prescription drugs. Not surprisingly, the pharmaceutical sector among healthcare stocks is going great guns. So, which drug makers should you buy? Amgen, for one, says Vancouver-based market watcher Colt Phillips. Mr. Phillips is a regular contributor to Investor’s Digest of Canada.

There’s been some interesting news lately from California-based Amgen Inc. (NASDAQ─AMGN), the world’s biggest independent biotech firm.

In June, Amgen submitted a proposal to the U.S. Food and Drug Administration for final approval to market its new cholesterol-lowering agent, Repatha.

Not only is this medication — classified as a PCSK9 inhibitor — a new approach to managing low-density lipoprotein, but it’s intended to serve either as an alternative or as an adjunct to traditional pharmacotherapy.

If Amgen’s proposal proves successful, the company hopes that doctors will be quick to embrace the new drug.

Specifically, the company is hoping that doctors will recommend Repatha to their patients instead of Lipitor, a drug made by giant healthcare stock Pfizer Inc. (NYSE─PFE), or Crestor, a product made by AstraZeneca plc (NYSE─AZN), Pfizer’s U.K.-based counterpart.

And in gaining market share from AstraZeneca, Amgen may be successful, given that Crestor, along with other “statin” drugs, has become increasingly controversial over the last few years because of the effects of drugs on cognitive functioning.

Amgen insists that it saw no such effects during Repatha’s clinical trials.

The company also contends that the drug is well-tolerated, although it remains to be seen if patients will use a product that will only be available as a twice-monthly injection and which likely won’t be cheap. The FDA is expected to make a final decision on Repatha in early August.

Net earnings are strong

Although Amgen now trades roughly where it did in January, it still posted strong first-quarter numbers, notching adjusted net earnings of US$9.35-$9.65 a share.

Among the top healthcare stocks, coverage on Amgen has been positive, with three analysts rating it as a “strong buy” and eight others, as a “buy.”

Price targets have averaged US$180.80, although one is as high as $195.  Amgen pays a quarterly dividend of US$0.79 a share.

Another pharmaceutical stock that’s worth watching is Illinois-based AbbVie Inc. (NYSE─ABBV).

A relative newcomer among healthcare sector stocks, AbbVie was split off from drug giant Abbott Laboratories (NYSE─ABT) in December 2012. Since then, AbbVie has more than doubled in value.

The company’s main revenue stream comes from Humira, an auto-immune modulator used to treat rheumatoid arthritis.

Not only did Humira generate 63 per cent of AbbVie’s revenue in 2014, but it’s expected to remain a moneymaker over the long term, despite the efforts of rivals, such as Amgen, to come up with their own version of the drug.

In the meantime, to gain revenue in cancer research, AbbVie earlier this year bought Pharmacyclics, a California-based biopharmaceutical outfit.

Pharmacyclics is now developing Imbruvica, a leukemia drug, for treating elderly patients.

Although Imbruvica’s phase III clinical trials look promising,  it’s likely too early to tell if it will be viable until the FDA weighs in.

Another molecule on the table at AbbVie is Viekira Pak, a Hepatitis C regimen, which hit the market in December 2014.

Admittedly, Viekira Pak hasn’t proved as profitable as originally thought, given that U.S. sales are only half of what the company expected for the first quarter. Nonetheless, AbbVie is optimistic that by the end of 2015, overseas sales will more than make up for this.

Target prices for AbbVie over the short term range from US$68-$90 a share, with the average for eight analysts coming in at US$75.50.

Two analysts now term the company a “strong buy;” nine others, a “buy.” AbbVie pays US$0.51 quarterly.

Another upswing healthcare sector stock worth watching is Indiana-based Eli Lilly and Co. (NYSE─LLY).

True, Lilly has seen falling sales, now that generic drug makers have moved in to copy Lilly’s products whose patents have expired.

Shares shoot up

But you’d never know this looking at the company’s stock price which, having shot up more than 15 points since January has hit a 14-year high.

This likely reflects positive results for the company’s new Alzheimer’s drug, Solanezumab.

If OK’d by the FDA, Solanezumab will become the first Alzheimer-specific drug on the market. It would likely drive Lilly’s revenue into the stratosphere of top healthcare stocks.

Analysts at Jefferies Group LLC, the New York investment firm, have raised their target price for Eli Lilly to US$100.

They’re also sticking with their enthusiastic “buy” recommendation.  The folks at Citigroup Inc. are also recommending Lilly as “buy.”

Back in Canada, the Toronto-Dominion Bank has been duking it out with Valeant Pharmaceuticals Intl. Inc. (TSX─VRX) for second place on the S&P/TSX Composite Index.

Valeant has had an impressive year, to say the least, with its stock shooting up 90 points since Jan. 1 — mainly because of the success of its CEO, Michael Pearson, on the mergers and acquisitions front.

Buffett is model

Indeed, many observers are drawing comparisons between Mr. Pearson and the Sage of Omaha himself, Warren Buffett.

Since 2008, for example, Valeant has snapped up nearly 100 companies, the collective brain power of which has allowed Valeant to broaden its healthcare solutions to include prescription drugs, over-the-counter preparations, and medical devices.

Valeant’s latest acquisition was its US$11 billion takeover of North Carolina’s Salix Pharmaceuticals in June.

Nonetheless, Valeant still has nearly US$6 billion in its war chest — a sum Mr. Pearson says he’ll use in the near future.

Despite Valeant’s strong run-up, Mr. Pearson still thinks the shares are undervalued, citing the growing market for healthcare solutions among Asia’s burgeoning middle class.


Investor’s Digest of Canada, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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