In 2020, pharmaceutical stocks came to the forefront as healthcare companies were searching for treatments for COVID-19. As represented by the SPDR S&P Pharmaceuticals ETF (XPH), the pharmaceutical industry gained 75% from March 23, 2020, to February 8, 2021. It has since leveled off a bit as the ETF is down 7% since then. But this provides us a buying opportunity to pick up some shares on the dip.
Much like technology companies, healthcare companies, and pharmaceutical companies, in particular, represent the future, as an aging boomer population will start requiring more medications and healthcare needs. A large percentage of the population is already heavily medicated, so imagine what it will be like in twenty to thirty years. That's why adding pharmaceutical companies to your portfolio now isn't a bad idea.
The key is finding companies with solid fundamentals and consistent growth, which our proprietary POWR Ratings system can help you with. So, I ran a screen for three top pharmaceutical companies in our database that also had notable growth drivers expected to drive their share prices up. This is why I am highlighting Bristol-Myers Squibb Company (BMY), Johnson & Johnson (JNJ), and Novo Nordisk A/S (NVO) below.
Bristol-Myers Squibb Company (BMY)
BMY discovers, develops, and markets drugs for various therapeutic areas, such as cardiovascular, oncology, and immune disorders. A key focus for the company is immuno-oncology, where the firm is leading in drug development. The company has also exited several nonpharmaceutical businesses to focus on branded specialty drugs, which have stronger pricing power.
BMY acquired Celgene and its multiple myeloma drug, Revlimid, in November 2019. This drug is driving a lot of growth for the company as it's approved for several indications, such as myelodysplastic syndromes and mantle cell lymphoma, in addition to multiple myeloma. Revlimid is seeing market share gains. Plus, patients are using the medication for longer durations, which is contributing to its growth.
The company's other multiple myeloma drug, Pomalyst, is also aiding revenue growth. BMY has an overall grade of A, which translates into a Strong Buy rating in our POWR Ratings system. The company has a Growth Grade of A as sales have grown an average of 20.4% over the past five years. Plus, EBITDA is expected to rise 30% this year.
BMY also has a Value Grade of A due to its attractive valuation metrics. For instance, the company has a forward P/E of only 8.69 and a price-to-book ratio of 3.86, below the industry average. We also provide Momentum, Stability, Sentiment, and Quality grades for BMY, which you can find here. BMY is ranked #6 in the Medical – Pharmaceuticals industry. For more stock in this industry, click here.
Click here to check out our Healthcare Sector Report for 2021
Johnson & Johnson (JNJ)
JNJ, the world's largest healthcare firm, operates through three divisions: pharmaceutical, medical devices and diagnostics, and consumer. The drug and device segments represent close to 80% of sales and drive the majority of cash flows for the firm. The consumer segment includes offerings in baby care, beauty, oral care, over-the-counter drugs, and women's health.
As the economy has opened up in the United States, which is J&J's primary market, the company is expected to see increased demand in the pharma and medical devices segments. This is especially notable in elective procedures and patient visit volumes, which should drive strong medical device sales and growth in pharmaceutical revenues.
The pharmaceutical segment is expected to benefit from increased demand for key drugs such as Stelara, Imbruvica, Darzalex, and a strong pipeline of 14 novel drugs expected to launch by the end of 2023. JNJ has an overall grade of A, which is a Strong Buy rating in our POWR Ratings system. The company has a Stability Grade of A as both its financials and price returns have been stable.
JNJ also has a Quality Grade of B due to a healthy balance sheet. The company had $24.6 billion in cash as of the end of the most recent quarter. This compares to only $3.4 billion in short-term debt. Management is also quite efficient, with a return on equity of 23%. For the rest of J&J's grades (Growth, Value, Momentum, and Sentiment), click here. JNJ is ranked #1 in the Medical – Pharmaceuticals industry.
Novo Nordisk A/S (NVO)
NVO is the leading provider of diabetes-care products globally, with a 50% market share of the global insulin market and a 28% share of the $50 billion-plus diabetes treatment market. The company manufactures and markets various human and modern insulins, injectable diabetes treatments, and oral antidiabetic agents.
NVO also has a biopharmaceutical segment that specializes in protein therapies for hemophilia and other disorders. The company is expected to benefit for the foreseeable future as the prevalence of diabetes is skyrocketing due to an increasingly overweight and aging population. Plus, the diabetes market is shifting from human insulin toward modern insulin analogs, including the company's Levemir and NovoLog treatments.
These modern treatments offer improved convenience, efficacy, and safety for patients. NVO also sees growth in GLP-1 therapies, including the company's daily Victoza drug, weekly Ozempic drug, and Rybelsus. The GLP-1 market is expected to double over the next five years. NVO has an overall grade of A, translating into a Strong Buy rating in our POWR Ratings system.
The company has a Value Grade of B, which isn't surprising with a price-to-sales ratio of 9.3, which is well below the industry average. NVO also has a Quality Grade of A, which means it has a rock-solid balance sheet. In addition to a net profit margin of 33.8%, the company's debt to equity ratio of 0.2 is quite low. To access all of NVO's grades, click here. NVO is ranked #3 in the Medical – Pharmaceuticals industry.
BMY shares . Year-to-date, BMY has gained 3.49%, versus a 13.32% rise in the benchmark S&P 500 index during the same period.
About the Author: David Cohne
David Cohne has 20 years of experience as an investment analyst and writer. He is the Chief Value Strategist for StockNews.com and the editor of POWR Value newsletter. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers.
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