More than $320 billion was spent on prescription drugs in the U.S. in 2016, a figure that's expected to nearly double to $610 billion by 2021, according to IQVIA (formerly QuintilesIMS).
With so much money being spent on necessary medicines, there's serious opportunity for pharmaceutical companies and investors alike. Some drugmakers present better opportunities than others do, though. Here's what you need to know about the top pharmaceutical stocks to buy in 2019.
Image source: Getty Images.
What is the pharmaceutical industry?
The pharmaceutical industry includes both big pharma companies that generate billions of dollars and tiny biotechs still years away from possibly turning a profit. Whether they're Goliaths or fledglings, pharmaceutical companies share several common attributes.
All pharmaceutical companies have the same general approach for developing drugs, beginning with drug discovery -- finding an experimental drug that holds promise in treating a targeted disease. Next, the experimental drug is advanced to preclinical testing conducted in labs and in animals.
If preclinical testing goes well, the company will seek approval from the U.S. Food and Drug Administration (FDA) to begin clinical testing in humans in the U.S. or from the European Medicines Agency (EMA) to begin clinical testing in Europe. This process is different than approvals for medical devices, which have varied approval pathways depending on the safety risks associated with the devices.
If the necessary approvals are obtained, the experimental drug moves into a relatively small phase 1 clinical trial with a primary purpose of evaluating the drug's safety. Upon successful completion of a phase 1 clinical trial, the drug is usually advanced into a phase 2 study. This stage of clinical testing focuses largely on how effective the drug is at treating the targeted disease, also called an indication or endpoint.
After meeting the goals of the phase 2 study, most drugs transition into one or more phase 3 clinical studies, which are larger in scope and are aimed at evaluating a drug's safety and efficacy in a more comprehensive way. If phase 3 testing is successful, the pharma company can file for regulatory approval of the drug with the FDA, EMA, or other regulatory agency in whatever country they hope to market the medicine.
In some cases, however, a drug can obtain FDA approval after successful completion of phase 2 studies. This accelerated approval process is reserved for drugs that treat serious conditions for which there is an unmet medical need and that can be evaluated using what's called a surrogate endpoint -- a laboratory measurement, radiographic image, physical sign, or other measure that scientists think predicts a clinical benefit but doesn't itself conclusively establish a clinical benefit.
Most drugs that begin clinical testing fail somewhere along the way. Only around 63% of drugs that were in phase 1 clinical studies advanced to a phase 2 study between 2006 and 2015, according to the industry trade group Biotechnology Innovation Association (BIO). Less than 31% of the drugs that made it to phase 2 testing went on to phase 3. Pharma companies filed for approval for 58% of these drugs in phase 3 studies. Of the drugs submitted for approval, roughly 85% actually won it. Overall, fewer than 1 out of 10 drugs that entered phase 1 testing ultimately won FDA approval.
Winning regulatory approval isn't the last hurdle for pharmaceutical companies, though. They must also secure reimbursement for the new drug from government and private payers. In the U.S., drugmakers typically negotiate directly with health insurers and pharmacy benefits managers (PBMs), which act as third-party administrators of prescription-drug programs for payers, as well as with the Centers for Medicare and Medicaid Services (CMS) for Medicaid pricing. In Europe and many other parts of the world, pharma companies must negotiate with government agencies.
It's possible that pharma companies will also have to negotiate directly with CMS for Medicare in the future. CMS oversees the Medicare/Medicaid healthcare programs, but individual states administer their Medicaid benefits. Close to $130 billion per year is spent by CMS on prescription drugs for the Medicare program. That's twice as much as the combined Medicaid prescription drug spending across the states, which is roughly $64 billion, but -- for now, at least -- CMS can't negotiate drug prices and instead must take the average selling price negotiated by private Medicare Part D prescription drug plans.
Traditional drugs are usually given five years of exclusivity in the U.S. before a generic version can enter the market. Biologic drugs, which are medicines that use living organisms, don't have generic versions. They can, though, have biosimilars -- another biologic for which there isn't a clinically meaningful difference from the already-approved product. Biologics are given 12 years of exclusivity in the U.S. before biosimilar competition is allowed. Drugmakers typically also secure patents on their drugs that provide even more protection against competition from generic and biosimilar rivals.
What is a pharmaceutical stock?
Not every company has shares that are available to be bought by investors. The stocks of publicly traded companies, though, can be bought and sold by individual investors on stock exchanges or in stock quotation services known as over-the-counter markets.
Pharmaceutical stocks are the stocks of publicly traded companies that engage in developing and marketing prescription drugs. These companies include many that focus exclusively on prescription drugs. However, some large companies such as Johnson & Johnson (NYSE: JNJ) are involved in the pharmaceutical industry as well as other parts of healthcare like medical devices and consumer health products.
In general, the potential for pharmaceutical stocks to generate solid gains in the future appears to be quite good. Spending on prescription drugs in the U.S. is projected to nearly double to $610 billion by 2021 in large part because of aging demographic trends. Around 10,000 baby boomers reach retirement age every day, according to the AARP. As this large generation ages, the demand for prescription drugs will continue to rise.
But with overall prescription drug spending increasing, government and private payers are scrambling to find ways to control costs. Both Democrats and Republicans in the U.S. Congress, as well as President Trump, have put the heat on pharmaceutical companies that have significantly raised drug prices. These political pressures could negatively impact pharma companies' revenue growth and their stock price gains despite the tailwinds for the industry from demographic trends.
As a result of these risks, pharmaceutical stocks aren't great picks for all investors. These stocks are best suited for growth investors who are willing to take on considerable risk and who won't need to access their initial investments within the next 5 to 10 years.
How to find the best pharmaceutical stocks
Just like with all investing, a potential investor aiming to find a pharmaceutical stock to add to their portfolio should look closely at the company's financial condition. Researching and developing new drugs requires a lot of money. It's important that the drugmaker has access to the cash needed to fund this research and development (R&D).
For established pharmaceutical companies, check out their approved products. In particular, examine the sales growth of these approved drugs. Determine if there are other rival drugs that could cannibalize its current market share or apply downward pressure on the pricing. You should also find out how much time the drugs have before they might face generic or biosimilar competition.
Because even successful drugs have limited windows to make most of their money before they lose exclusivity, it's also important to assess the pharma company's pipeline. These experimental drugs represent a company's opportunities for future growth.
As you might expect, in general, it's better for a company to have more drugs in later phases than in early phases of clinical testing. The odds of failure for early-stage drugs are very high. A drugmaker with several pipeline candidates in phase 3 studies that performed exceptionally well in phase 2 testing and that don't have many rivals already on the market or in late-stage development has a better shot at success than others will.
Large pharmaceutical companies typically have larger pipelines with more late-stage candidates. This tends to make these big pharma companies less risky overall than smaller drugmakers. However, large companies also aren't likely to grow as quickly as smaller companies could. For investors seeking strong growth prospects, relatively smaller drugmakers are likely to be more attractive.
Top pharmaceutical stocks for 2019
The best pharmaceutical stocks have great approved products that are delivering significant revenue growth. These stocks are either already very profitable or on track for profitability in the near future, with solid pipelines of drug candidates that should be able to generate even more growth.
These are the top five pharmaceutical stocks to buy in 2019:
|AbbVie (NYSE: ABBV)||$119.3 billion|
|Exelixis (NASDAQ: EXEL)||$7.2 billion|
|Intercept Pharmaceuticals (NASDAQ: ICPT)||$3.3 billion|
|Pfizer (NYSE: PFE)||$237.6 billion|
|Vertex Pharmaceuticals (NASDAQ: VRTX)||$47.7 billion|
Data source: Yahoo! Finance. Market caps as of April 1, 2019.
AbbVie's current products include three blockbuster drugs (i.e., drugs that generate annual sales of $1 billion or more). The most important of these is immunology drug Humira, which ranks as the world's top-selling drug and is expected to stay at the top at least through 2024. AbbVie's cancer drug Imbruvica and its hepatitis C drug Mavyret round out the company's list of current blockbusters. These and other products enabled AbbVie to make revenue of $32.8 billion and earnings of $5.7 billion in 2018.
Humira already faces biosimilar competition in Europe, however. Biosimilar rivals will enter the U.S. market in 2023. That gives AbbVie a few years for some of its other products to step up. In the meantime, AbbVie's dominance in the U.S. should allow it to hold onto market share domestically. The company is competing against biosimilars in Europe by lowering its pricing for Humira.
Imbruvica continues to generate strong sales growth and should keep the momentum going as it wins approvals for treating additional types of cancer. Sales for another of AbbVie's cancer drugs, Venclexta, are also expected to soar over the next few years. The company's endometriosis drug, Orilissa, should be another blockbuster success, especially if it picks up FDA approval for treating uterine fibroids as well.
AbbVie's pipeline also looks really impressive. The company anticipates winning FDA approval in 2019 for immunology drugs risankizumab and upadacitinib, both of which had great phase 3 study results. AbbVie thinks that these two candidates will be key to achieving its goal of delivering $35 billion in non-Humira sales by 2025.
In addition to its solid growth prospects, AbbVie pays a strong dividend with a yield of over 5%. The company has increased its dividend by 168% since being spun off from parent Abbott Labs in 2013.
Exelixis' top growth driver is cancer drug Cabometyx. However, the company also has three other approved products: Cometriq (which uses the same compound as Cabometyx but is an oral capsule rather than a tablet), melanoma drug Cotellic, and hypertension drug Minnebro (currently only approved in Japan).
Cabometyx has been tremendously successful in treating advanced renal cell carcinoma (RCC), the most common type of kidney cancer. In 2018, the drug helped boost Exelixis' total revenue by nearly $276 million. Sales are likely to pick up quite a bit in 2019. In January, Exelixis received FDA approval for Cabometyx as a treatment for previously treated advanced hepatocellular carcinoma (HCC) -- the most common type of liver cancer.
Exelixis shouldn't have to fret about generic competition for Cabometyx anytime soon. The drugmaker's first key patent for its top drug doesn't expire until 2024, with the last of its patent portfolio for Cabometyx stretching out until 2033.
The company's top pipeline candidate is also Cabometyx. Exelixis has phase 3 clinical studies in progress evaluating the drug in treating thyroid cancer and previously untreated advanced liver cancer. CEO Michael Morrissey said in the company's fourth-quarter 2018 earnings conference call that the company intends to add more pipeline programs through strategic acquisitions and licensing deals. With a growing cash stockpile and earnings, Exelixis shouldn't have a problem funding purchases of early-stage candidates, which is the most likely course for the drugmaker -- and one that is less likely to negatively impact the stock.
3. Intercept Pharmaceuticals
Intercept Pharmaceuticals isn't profitable yet. The company lost more than $309 million in 2018, but Intercept's revenue continues growing significantly, and it's making progress toward profitability. That progress should kick into overdrive in the not-too-distant future.
The drugmaker's only approved product right now is Ocaliva (also known as obeticholic acid or OCA). The drug got FDA approval in 2016 as a treatment for chronic liver disease primary biliary cholangitis (PBC). But in February, the company reported encouraging results from a phase 3 study of Ocaliva in treating patients with liver fibrosis due to nonalcoholic steatohepatitis (NASH). There currently are no approved treatments for NASH, so the disease presents a huge opportunity for drugmakers. However, there has been a high-profile setback for one experimental NASH drug and a phase 2 failure for another. Intercept appears to be in the driver's seat to be the first to market a NASH treatment with Ocaliva.
The company is also targeting other chronic liver diseases. Intercept has a couple of phase 2 studies underway evaluating OCA in treating primary sclerosing cholangitis and biliary atresia. The potential in NASH alone, however, could be enough to make Intercept a big winner over the next few years.
Pfizer ranks as one of the largest pharmaceutical companies in the world. It claims 10 blockbuster products and a long list of other drugs that generate hundreds of millions of dollars in annual sales. But Pfizer hasn't generated the kind of revenue growth that the other drugmakers that made this list of pharmaceutical stocks to buy in 2019 have. So why does it deserve a spot among these top picks? Pfizer's future over the next few years looks far more promising than its past.
By mid-2020, Pfizer should begin moving past the negative impact on year-over-year sales comparisons caused by the loss of exclusivity for several of its drugs, especially Lyrica. That will set the stage for the company's fast-growing products, including blood thinner Eliquis, immunology drug Xeljanz, and cancer drug Lorbrena, to shine.
Pfizer also appears to have its best pipeline in years. The company anticipates winning FDA approval in 2019 for tafamidis in treating rare genetic disease transthyretin amyloid cardiomyopathy. It also has more than two dozen programs in phase 3 clinical studies.
Like AbbVie, Pfizer also offers investors an attractive dividend with a current yield of 3.4%. This dividend, combined with improving growth prospects in the coming years, should enable Pfizer to deliver solid total returns over the long run.
5. Vertex Pharmaceuticals
Vertex is arguably the best biotech stock on the market. The company has three approved products that treat cystic fibrosis (CF): Kalydeco, Orkambi, and Symdeko. Success for these CF drugs boosted Vertex's revenue by 40% in 2018 to more than $3 billion and more than doubled its earnings to reach more than $1 billion.
Competition isn't a significant worry for Vertex right now. The company's drugs are the only approved CF treatments that address the underlying cause of the disease. Its closest potential rival, AbbVie, remains well behind Vertex in clinical development.
But the best news for Vertex could be just around the corner. The company expects to file for approval in the U.S. and in Europe in mid-2019 for its triple-drug combination therapies for the treatment of CF. These drugs hold the potential to expand Vertex's addressable patient population by 75%.
In addition, Vertex's pipeline includes other promising candidates. Vertex is conducting a phase 2 study of experimental pain drug VX-150. The company is also partnering with CRISPR Therapeutics in evaluating gene-editing therapy CTX001 in phase 1 studies for treating rare genetic blood diseases beta thalassemia and sickle cell disease.
Despite their promise, each of these pharmaceutical stocks faces key risks any potential investors need to understand before buying.
The most serious risk is the possibility of failure in clinical studies, like that suffered by AbbVie in 2018 when its cancer drug Rova-T flopped in the clinic. There's also a chance that any of the drugmakers could run into regulatory approval obstacles even if clinical studies are successful. And there's even the possibility that the FDA could change a product's label in ways that reduce its attractiveness to prescribers and patients or require a product to be withdrawn from the market after the drug has won approval.
All of the companies could be negatively impacted by competition. Even if Intercept's Ocaliva becomes the first approved NASH drug, it's only a matter of time before other NASH treatments will win approval. Vertex will likely experience competition in CF sooner or later as well. AbbVie, Exelixis, and Pfizer already go head-to-head against rivals.
As the sole unprofitable company on the list, Intercept has the added challenge of funding operations with its current cash stockpile. It's possible that Intercept could need to raise additional capital in the future through debt or issuing new shares, both of which present risks for investors. Adding debt would increase Intercept's interest expense and likely delay the company achieving profitability. Issuing new shares would cause dilution in the value of existing shares. (Think of this like a pie that has 10 slices initially. If the pie is cut into 20 slices -- the equivalent of issuing new shares -- everyone's slice becomes smaller.)
Drugmakers also face the prospects of lawsuits from patients over safety allegations and from other companies over potential patent infringements. Their risks include several developments that could exert downward pressure on drug prices, including any significant federal changes.
For example, several Democrat presidential candidates are promoting a Medicare-for-All program that would mean that all pharmaceutical companies would negotiate drug pricing only with the federal government rather than with multiple private payers. Sen. Elizabeth Warren, D.-Mass., wants the federal government to manufacture generic drugs in some cases. In addition, there are questions about who will head up the FDA after Scott Gottlieb's resignation and what changes the new FDA commissioner might make that could negatively impact pharma companies.
Investing in pharmaceutical stocks, like investing in any industry, involves taking on risk in the hope of future rewards. AbbVie, Exelixis, Intercept, Pfizer, and Vertex certainly have risks, but they also provide investors a good chance of making solid returns over the long run. Each of these pharmaceutical companies should be able to leverage their past and current success into developing new drugs that will be the blockbusters of the future.
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Keith Speights owns shares of AbbVie, Pfizer, and Vertex Pharmaceuticals. The Motley Fool owns shares of and recommends Exelixis. The Motley Fool owns shares of CRISPR Therapeutics. The Motley Fool recommends Intercept Pharmaceuticals and Vertex Pharmaceuticals. The Motley Fool has a disclosure policy.