The health care industry is massive with multiple moving parts. One of the largest subsectors of the industry is the pharmaceutical sector. According to Statista, about $1.27 trillion was spent on pharmaceuticals in 2020.
It’s no surprise to see that some of the biggest opportunities in the stock market are centered around pharmaceutical companies.
When people are sick, they tend to turn to medicine for relief, and that’s not likely to change any time soon. By investing in the companies that produce these often life-saving medications, not only will you have the opportunity to generate significant profits, but you’ll rest well knowing you’re involved in the production of products that both improve the quality of life and extend the length of life for countless people.
Factors That Affect Pharmaceutical Stocks
While the pharmaceutical industry has the potential to yield significant growth in your investment portfolio, it’s important to remember that, as with any other type of stock, not all pharma stocks are created equal. There are a few factors to keep in mind when on the search for the best stocks in the sector:
- Anything Can Happen in Clinical Trials. There are tons of companies working to develop new therapeutics, but the most stable investments are in companies that already have products on the market. No matter how promising a clinical-stage therapy may be, anything can happen in clinical trials. When investing in early-stage biotech stocks, if a trial fails for a company that has little else to fall back on, significant losses will likely be the result.
- Exclusivity Doesn’t Last Forever. Even successful companies in the sector face short exclusivity periods for pharmaceuticals, after which generic versions of their products will likely be released. Generic competitors can lead to significant reductions in revenue for the original developer of the therapy. It’s important to consider exclusivity of flagship products and the level of diversity in the company’s product offerings prior to investing.
- The Most Stable Companies Pay Dividends. While dividends don’t always mean that a publicly traded company is in good shape, they are often a sign of stability in the pharma industry. Beginners should focus on large, well-established pharma companies that offer dividend payments.
Pro tip: David and Tom Gardener are two of the best stock pickers. Their Motley Fool Stock Advisor recommendations have increased 563% compared to just 131.1% for the S&P 500. If you would have invested in Netflix when they first recommended the company, your investment would be up more than 21,000%. Learn more about Motley Fool Stock Advisor.
Best Pharmaceutical Stocks to Buy
Keeping these factors in mind, some of the most impressive stocks in the sector include:
1. Pfizer (NYSE: PFE)
Industry Giant With Consistently Strong Dividends
- 2020 Revenues: Last year the company generated $41.9 billion in revenue. While that figure decreased from 2019, the declines were largely attributed to reductions in sales as a result of less activity during the COVID-19 crisis, setting the stage for a strong recovery.
- Dividends: PFE has long been known to be a strong income stock. Over the past five years, the dividend yield on the stock has ranged from 3.07% to 5.41%, with an average yield of 3.87%.
- Fundamental Stats: From a fundamental standpoint, there’s a clear argument that the stock is undervalued compared to its peers. At the moment, the price-to-earnings (P/E) ratio on the stock is 11.65, far lower than the industry average P/E of 19.47 according to Finviz. Moreover, the stock trades with a low price-to-sales (P/S) ratio of just 4.75.
- Most Recent Financial Results: Pfizer beat analysts expectations in terms of both earnings and revenue in the second quarter. During the quarter, revenue was up 92.39% and net income climbed 59.44% on a year-over-year basis.
Pfizer became a household name in the midst of the coronavirus pandemic as one of the companies in the race to develop the first vaccine. In late August 2021, the two-dose Pfizer vaccine was the first to be fully approved by the United States Food and Drug Administration (FDA).
However, the company is no newcomer to the pharmaceuticals sector.
Founded in 1849, Pfizer has been producing therapeutic solutions for patients for more than a century and a half and has built a book of more than 300 products that it manufactures and distributes around the world.
Patients who find themselves at the doctor for anything from the common cold to cancer may be prescribed one or more of Pfizer’s drugs. Due to its vast product lineup and continued innovation on a massive pipeline of potential blockbuster medicines, the company is largely shielded from declines in sales of products as exclusivity periods expire.
2. AbbVie (NYSE: ABBV)
A Long History of Compelling Revenue and Earnings While Offering Impressive Dividends
- 2020 Revenues: In 2020, AbbVie produced well over $45 billion in revenue, representing significant growth over the just above $33 billion it produced in 2019.
- Dividends: The dividends offered to investors throughout the company’s history have been eye-opening. In the past five years, yields have ranged from 2.13% to 6.81%, averaging out at 4.21%.
- Fundamental Stats: Fundamental analysis suggests the stock is significantly undervalued compared to its peers. As of September 2020, the P/E and P/S ratios on the stock were just 9.62 and 3.99 respectively, both significantly below industry averages.
- Most Recent Financial Results: In the second quarter, the company beat analyst expectations on both revenue and earnings, with revenue up 33.9% and net income climbing 203.79% on a year-over-year basis.
AbbVie is one of the world’s largest pharmaceutical and biotech companies with a market capitalization of more than $200 billion thanks to several successful medications.
This is the company behind Humira, the best-selling drug in the world. Humira is approved as a treatment for several conditions including Crohn’s disease, rheumatoid arthritis, plaque psoriasis, and psoriatic arthritis, and drove nearly $20 billion in revenue in 2020 alone.
However, the stock is a topic of much debate, and for good reason. AbbVie will lose market exclusivity for Humira in 2023, and a significant decline in the sales of the drug is expected.
However, investors shouldn’t be so concerned about the declines in Humira revenues. The company has been hard at work to diversify its pipeline and drive growth. Back in 2019, the company acquired Allergan, the developer of Botox as well as several eye care and women’s health products.
AbbVie is also doubling down on therapeutics in its own pipeline like Skyrizi, a treatment for plaque psoriasis, and Rinvoq, a treatment for rheumatoid arthritis. Annual sales on both of these products more than doubled last year.
Like Pfizer, AbbVie has a highly diversified portfolio of products in a wide range of pharmaceutical subsectors, including immunology, oncology, aesthetics, neuroscience, and eye care.
Moving forward, investors can expect several new drugs to hit the market, with dozens of therapeutics currently in clinical studies for high-value indications.
All told, the company is likely to make it through the Humira exclusivity hiccup just fine, and the stock is heavily undervalued thanks to the near-term concern.
AbbVie has a long history of producing compelling revenue and earnings while offering impressive dividends. Add in strong recent financial results and fundamentals that point to a clear undervaluation, and you have a winner.
Pro tip: Before you add any stocks to your portfolio, make sure you’re choosing the best possible companies. Stock screeners like Trade Ideas can help you narrow down the choices to companies that meet your individual requirements. Learn more about our favorite stock screeners.
3. Bristol-Myers Squibb (NYSE: BMY)
Strong Fundamentals, Earnings Performance, and Impressive Dividends
- 2020 Revenues: Largely thanks to the company’s new drugs and acquisition activities, revenue climbed substantially year-over-year in 2020, jumping from $26.145 billion in 2019 to $42.518 billion last year.
- Dividends: With impressive dividends, the stock is a hot pick among income investors. Over the past five years, yields have ranged from 2.28% to 3.81%, averaging 2.89% in the period.
- Fundamental Stats: From a valuation standpoint, the stock is one of the most undervalued on this list, with a P/E ratio of 8.82 and a P/S ratio of 3.39.
- Most Recent Financial Results: In the past quarter, the company beat expectations for both revenue and earnings. Revenue grew 15.44% year-over-year, which is impressive in and of itself. However, the real jaw-dropping figure was net income growth, which clocked in at a whopping 1,341.18%.
Bristol-Myers Squibb is another of the world’s largest pharmaceutical companies, boasting a market cap of more than $146 billion. Founded in 1887, this is another company with more than a century of providing pharmaceutical solutions for patients in need.
The company focuses heavily on some of the most debilitating conditions in the world. Its treatments are commonly prescribed to treat conditions like cancer, AIDS, cardiovascular disease, diabetes, hepatitis, rheumatoid arthritis, and psychiatric disorders.
Although Bristol-Myers is already a massive player in its sector, it’s always looking for opportunities to grow. In recent years, it has focused on acquisitions that add significant value to both the company’s portfolio of products on the market and clinical and developmental-stage pipeline.
The company bought Celgene for $74 billion in 2019 and acquired MyoKardia for $13.1 billion in 2020. Not to mention its work to bring Revlimid, Pomalyst, Abraxane, and Vidaza to market. Each of these has the potential to generate billions of dollars in revenue per year.
4. Johnson & Johnson (NYSE: JNJ)
Long History Of Producing Value For Its Investors Through Dividend Payments and Stock Repurchase Plans
- 2020 Revenues: Johnson & Johnson saw modest revenue growth in 2020, with revenues clocking in at $82.584 billion, up from $82.059 billion. However, the company has a history of much more impressive growth. Unfortunately, thanks to COVID-19, sales of various consumer goods were down, resulting in the slow growth in 2020.
- Dividends: Johnson & Johnson stock is known for providing compelling income. Over the past five years, yields have clocked in at an average of 2.59%, with a low of 2.24% and a high of 3.42%.
- Fundamental Stats: While it’s not the most undervalued stock on this list, JNJ is modestly undervalued compared to the pharmaceuticals sector, with a P/E ratio of 17.92 and a P/S ratio of 5.18.
- Most Recent Financial Results: The company has long been a strong performer during earnings season. It has beaten both revenue and earnings expectations by wide margins for the past four consecutive quarters. In the most recent quarter, revenues were up 27.14% and net income climbed 73.14% year-over-year.
Johnson & Johnson is a household name. You’ve probably heard plenty about its COVID-19 vaccine, but it was a highly recognized name long before COVID. Known for baby shampoos and other baby products, you may be surprised to learn that Johnson & Johnson actually represents one of the largest pharma companies in the world.
In fact, the company is the developer, manufacturer, and distributor of more than 65 drugs indicated to treat serious conditions ranging from cancer to inflammation and bacterial infections.
However, there’s no denying the potential that comes along with the company’s COVID-19 vaccine, which is likely to produce billions of dollars per year. While many may expect COVID to become a thing of the past, data suggests that the current vaccines lose efficacy after several months. Moreover, with the virus mutating into various strains, there’s a strong chance that COVID could require regular vaccines, much like the flu.
With a robust lineup of already approved products and a pipeline of clinical-stage products that are just as impressive, even if COVID were to disappear tomorrow, the stock would be one well worth considering.
5. Amgen (NASDAQ: AMGN)
More Than Four Decades of Providing Strong Growth and Income for Investors
- 2020 Revenues: While growth slowed in 2020 due to the COVID-19 crisis, revenues were still impressive. During the year, the company produced $25.4 billion, showing strong growth from the $23.362 billion in revenue generated in 2019.
- Dividends: The company is known for showing appreciation for investors by way of dividend payments and share buybacks. Over the past five years, the average dividend yield on the stock has been 2.67%, with the low yield coming in at 2.16% and the high yield coming in at 3.32%.
- Fundamental Stats: From a fundamental standpoint, Amgen looks attractive, to say the least. As of September 2021, the stock traded with a P/E ratio of 13.40 and a P/S ratio of 5.09.
- Most Recent Financial Results: The pharmaceutical giant is known for posting impressive financial results. In three of the past four quarters, the company beat expectations on both revenue and earnings. In the last quarter, revenue climbed 5.16% on a year-over-year basis. While net income was down more than 74%, investors and analysts alike expected a steeper decline as the company focused on investments in growth.
Amgen is another massive player in the pharmaceuticals space with a market cap of more than $126 billion. The company’s claim to fame is its work in the oncology sector as it aims to produce therapeutics for patients with some of the world’s most debilitating cancers.
However, cancer isn’t the only ailment the company intends to treat. The company currently has more than 20 products on the market, all of which are designed and indicated to treat serious conditions, and most of which treat conditions for which there are few or no other options.
The focus on the development of therapies for serious conditions with limited alternative treatment options has proven to be an effective strategy. The company has several blockbuster therapies on the market, generating more than $20 billion in annual revenue combined.
Amgen has no plans to stop innovating either. It has a robust pipeline, featuring 23 Phase 1 clinical trials, 12 Phase 2 trials, and 20 Phase 3 trials centered around 38 different clinical candidates designed for patients with conditions ranging from obesity to cancer.
With multiple hit products already on the market and a pipeline featuring several major opportunities, it only makes sense that this stock is one for the watchlist.
6. Gilead Sciences (NASDAQ: GILD)
Known for Driving Revenue and Paying Meaningful Dividends
- 2020 Revenues: In 2020, Gilead Sciences produced revenues of $24.4 billion. That works out to 10% year-over-year growth in the top line.
- Dividends: Gilead is also known for paying compelling dividends to investors. Over the past five years, yields have averaged 3.34%, with a lowof 2.20% and a high of 4.80%.
- Fundamental Stats: Yet another undervalued stock on the list, GILD trades with a P/E ratio of 10.07 and a P/S ratio of just 3.45.
- Most Recent Financial Results: Finally, the company smashed earnings and revenue expectations in its most recent earnings report, just as it has in three of the past four quarters. In the second quarter, revenue was up 20.88%, while net income climbed a whopping 145.58%.
Founded in 1987, Gilead Sciences is relatively young compared to others on this list, but don’t let its age fool you. The company is one of the largest pharmaceutical companies in the world thanks to its work in the treatment of hepatitis C.
The company is the developer behind Harvoni and Sovaldi, two smash-hit treatments that have a proven ability to cure most hepatitis C infections, which was incurable just a decade ago.
Gilead Sciences has also tapped into other high-value subsectors of the pharmaceutical industry. The company currently markets multiple products approved for indications ranging from HIV and AIDS to COVID-19, liver disease, cancer, and heart failure.
The company’s pipeline is just as impressive as its portfolio of approved drugs, with several potential hit medications that will likely be approved for various indications in the future.
7. Merck & Co. (NYSE: MRK)
One of the Longest-Standing Pharma Companies in the World, and Possibly Heavily Undervalued
- 2020 Revenues: The company saw strong gains in revenue from 2019 to 2020, producing $46.84 billion in 2019 and $47.994 billion in 2020.
- Dividends: The company is also known as a strong stock for income investors, offering average dividends of 2.94% over the past five years. During this period, the high yield was 3.57% and the low was 2.42%.
- Fundamental Stats: The fundamental data surrounding the stock paints yet another picture of undervaluation. As of September 2021, the P/E and P/S ratios on the stock were 11.32 and 3.84, respectively.
- Most Recent Financial Results: Unfortunately, MRK has had a tough time keeping up with analyst expectations over the past year. The company missed revenue expectations, earnings expectations, or both in three of the past four quarters. In the most recent quarter, the company beat revenue expectations with year-over-year growth of 29.91%, but missed earnings projections with a 48.53% decline in net income.
Merck & Co. was established in 1891, but its lineage goes back even farther. It was established as a subsidiary of Merck Group, a German company founded back in 1668.
Today, Merck is one of the largest and most well respected biopharmaceutical companies, boasting a market capitalization of more than $193 billion and employing tens of thousands of people around the world.
The company is focused on the development of pharmaceutical treatments in four key areas:
- Oncology. Merck is one of the largest producers of medications for patients with various forms of cancer. To date, more than 400,000 patients have been treated with the company’s cancer-fighting drugs.
- Infectious Disease. The company is also an active player in the infectious disease space, offering treatments for life-threatening conditions like AIDS and ebola. In fact, the company is one of the world’s largest suppliers of penicillin and other drugs known to fight infections.
- COVID-19. COVID-19 is another primary area of interest for Merck. It even plays a key role in the manufacturing of the vaccine produced by Johnson & Johnson.
- Cardio-Metabolic Disorder. Finally, Merck has several products on the market designed to combat cardio-metabolic conditions like diabetes and heart failure.
While Merck’s current products are impressive in and of themselves, there’s more to this story with a pipeline consisting of several clinical trials and clinical-stage assets across a wide range of indications. Considering the company’s history of dominance in the pharmaceuticals space, there’s a strong chance that multiple products within its pipeline will prove to be massive revenue drivers in the long run.
8. Moderna (NASDAQ: MRNA)
Developing mRNA Treatments; Strong Growth in Revenue and Earnings Since Leading Against COVID-19
- 2020 Revenues: In 2019, the company generated a respectable $60.2 million in revenue. In 2020, that number skyrocketed to $803 million, and the growth seems to be continuing in a big way. In the second quarter of 2021, the company generated $4.4 billion in revenue in just three months.
- Dividends: As a new player in the pharmaceuticals arena, Moderna spends its excess money on growth, which is paying off. The downside is that the company doesn’t pay dividends as of yet.
- Fundamental Stats: From a fundamental standpoint, the picture is mixed with this stock. The P/E ratio was 12.90 as of September 2021, which is below the industry average, but the P/S ratio was 22.93, which is quite high. Nonetheless, investors expect significant growth in sales ahead as the company’s vaccine rollout continues.
- Most Recent Financial Results: The growth in the company’s sales, revenue, and earnings has been tremendous since its coronavirus vaccine was approved. In the second quarter, it beat analyst expectations by wide margins, producing more than 6,398% revenue growth and more than 2,476% net income growth.
Founded in 2010, Moderna is a relatively young pharmaceutical and biotech stock that became a household name during the COVID-19 pandemic. As you likely already know, the company produced one of the first vaccines that was approved for emergency use in the U.S. by the FDA.
However, the company’s COVID vaccine isn’t the only reason to be excited about its work.
Moderna is focused on creating vaccines and therapeutic options through the use of messenger RNA (mRNA), which are crucial for protein production in the human body. By altering the blueprints carried to cells with mRNA, the company is showing promise in the ability to train the body to be immune to viruses and other ailments while providing a game plan for the body to fight some of the most debilitating conditions known to man.
Through its work with mRNA, the company was able to create a unique vaccine for COVID-19 and is working on multiple personalized vaccines for various types of cancer. Not to mention the multiple autoimmune disorders that have few or no therapeutic options that the company also is targeting.
9. Sanofi (NASDAQ: SNY)
Consistent Positive Annual Revenue Growth; Recent Addition of Dividends
- 2020 Revenues: In 2020, the company generated revenue of $42.687 billion, slightly higher than the $42.147 billion generated in 2019.
- Dividends: Sanofi hasn’t consistently paid dividends over the past five years, but dividends have become more reliable recently, with an average yield over the past five years of 3.83% and a yield of 3.67% as of September 2021.
- Fundamental Stats: Sanofi is another company that’s significantly undervalued according to the most widely accepted valuation metrics. The stock’s P/E and P/S ratios were 13.91 and 2.94 as of September 2021, both of which are well below industry averages.
- Most Recent Financial Results: In the most recent quarter, Sanofi delivered strong revenue results, beating analyst expectations, but missed with regard to earnings. Revenue was up more than 7% year over year, but net income tumbled more than 84%.
Founded in 2004, Sanofi is another relatively new company in relation to some others on this list, but it quickly grew to be a leader in the diabetes sector of the pharmaceuticals space. Its product Lantus, a medication used to treat both Type 1 and Type 2 diabetes, resulted in nearly $3 billion in revenue in 2020.
But the company’s star drug is known as Dupixent, which generated more than $3.5 billion in sales in 2020. Dupixent is a monoclonal antibody used to treat allergic diseases like eczema, asthma, and nasal polyps, and has flown off the shelves since shortly after the drug was approved.
Sanofi has three other drugs that generated more than $1 billion in revenue each in 2020 and several other drugs generating hundreds of millions of dollars per year.
Today, the company is venturing into other opportunities including oncology, neurology, and rare diseases. Its pipeline features three drugs currently making their way through the regulatory process, 24 Phase 3 clinical programs, 30 Phase 2 clinical programs, and 18 Phase 1 clinical programs, meaning there’s plenty to look forward to ahead.
10. Abbott Laboratories (NYSE: ABT)
A Vast Portfolio of Products on the Market; a Massive Revenue Driver and Strong Dividend Payer
- 2020 Revenues: In 2020, ABT generated $34.6 billion in revenue, showing significant growth over 2019’s $31.904 billion.
- Dividends: Although the company is known for paying consistent dividends, the yields aren’t going to turn any heads. Over the past five years, yields have averaged 1.72%, with a high of 2.7% and a low of 1.19%.
- Fundamental Stats: From a fundamental standpoint, the stock seems a bit overvalued, but that’s largely due to a premium many investors are willing to pay for a company with such a diversified portfolio and strong pipeline. At the moment, the P/E and P/S ratios on the stock are 27.10 and 5.76, respectively.
- Most Recent Financial Results: Abbott rarely disappoints when earnings season rolls in. The company beat analyst earnings expectations in all of the last four quarters and revenue expectations in the three of them. In the most recent quarter, revenue climbed 39.15% with net income jumping 121.42%.
Founded in 1888, Abbott Laboratories has a long history of providing medical products to consumers.
With more than 1,500 products on the market, it would be impossible to go through all of them. The company’s pharmaceutical options are designed to treat various types of ailments:
- Cardiovascular Conditions. Heart diseases like high blood pressure and heart failure affect millions of people. The company offers a wide range of medications for just about every cardiovascular condition you can think of.
- Diabetes. Diabetes is a massive market for the companies that provide treatments. Abbott is one of the largest producers of therapeutics for diabetic patients.
- Diagnostics. The company also offers a wide range of diagnostics kits, providing accurate diagnoses of everything from influenza a and b to HIV and hepatitis.
- Neuromodulation. Using both medical devices and pharmaceutical options, it’s possible to activate specific neurological responses to treat varying conditions of the nervous system. Abbot offers a wide range of these therapies.
- Nutrition. The company also has a massive nutrition portfolio featuring products like Ensure and Pedialyte.
- Other Medicines. Abbott offers various products ranging from headache medicine to influenza vaccines listed in the “Other Medicines” category on its website.
If you’re interested in diving into the pharmaceuticals sector, you’re on the right track. Not only is the sector known for producing compelling returns, both in terms of price appreciation and income, it’s also known for providing a moral return, helping investors sleep well at night knowing their investments are improving the quality of life for their neighbors.
Nonetheless, as with any other class of stock, there are gems and there are pieces of coal. Regardless of the sector you invest in, it’s important to do your research before buying any stock.
Disclaimer: The author currently has no positions in any stock mentioned herein nor any intention to hold any positions within the next 72 hours. The views expressed are those of the author of the article and not necessarily those of other members of the Money Crashers team or Money Crashers as a whole. This article was written by Joshua Rodriguez, who shared his honest opinion of the companies mentioned. However, this article should not be viewed as a solicitation to purchase shares in any security and should only be used for entertainment and informational purposes. Investors should consult a financial advisor or do their own due diligence before making any investment decision.