Healthcare stocks primed for comeback in 2017? Here are Steve’s top picks

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The population of the world, and the US and developed nations in particular, is growing and getting older, while the costs of keeping people healthy and living longer are exploding. And yet in 2016, while the major US stock indices set new record highs, health care landed with a resounding “thud.”

In other words, the performance of healthcare stocks was, how shall I put it, ghastly–in relation to the rest of the market. But that was then, and we begin 2017 with some of us believing in the long-term staying power of the sector. With that in mind, what are the best healthcare stocks to buy for 2017?

Steve's Take: Here is my list of the best #healthcare stocks to buy for 2017 Click To Tweet

We all know it’s true that predicting the direction of the market, say, over the next 12 months–let alone over the long run–is impossible. Especially with an entirely new political regime being installed later this month. Generally though, stocks will continue to rise as long as the economy keeps chugging along.

The one incontestable fact that keeps shoring up positive sentiment toward the healthcare sector is that us boomers aren’t getting any younger but still expect to outlive our parents and defy mother nature by doing all the things we did in our 30’s.

That being said, whether looking for spectacular growth or “keep-a-chuggin” stability, let’s take a look at a diverse group of healthcare stocks and see what some of us think might make them the best possible picks. Regardless of the plethora of investment goals, chances are at least one pick could be a perfect fit for your portfolio. (Nb: The list is compiled in alphabetical order.)

  1. Celgene

Celgene (CELG), one of the heavy hitters in biotech, is poised for another standout year in 2017. Global spending on cancer meds approached $107 billion and by some reckoning could reach $150 billion in 2020. Revenue from Celgene’s blockbuster offering, the myeloma treatment Revlimid, isn’t just doing better each period–try 22% better in the first three quarters of 2016. It’s rising at an accelerating rate. Since snagging FDA approval in 2005, Celgene has transformed its blood-cancer treatment into a multibillion-dollar base upon which it’s plotting blistering long-term growth.

Other products also exceeded expectations: year-over-year sales growth of multiple myeloma treatment Pomalyst rocketed 33%, and Celgene’s first anti-inflammatory offering, Otezla, almost doubled. Looking ahead, Celgene has 11 late-stage clinical trials underway, as well as R&D partnerships with more than 20 companies which should keep its pipeline moving.

Shares have been trading for less than 18 times forward earnings, even after a solid post-election rally. Wall Street expects Celgene’s bottom line to grow at an eye-popping annual rate of about 22.5% over the next five years.

  1. Express Scripts

Pharmacy benefits manager Express Scripts (ESRX) proves that in this particular sector, bigger is mostly better. The company handles approximately 1.3 billion prescriptions annually, hoisting it to the number one spot among the nation’s largest PBMs.

In a nutshell, the company purchases medicines from traditional Pharma and dispenses them to millions of individuals covered by thousands of insurance firms, managed-care company’s and employers. Its huge size allows it to wrest the best prices from manufacturers.

Operating efficiencies definitely help Express Scripts increase its margins. Although slugging it out with insurer Anthem in a legal scuffle accusing it of overcharging for meds, analysts say any bad outcome is currently reflected in the companies shares.

  1. Ionis Pharmaceuticals

This less well-known biotech’s bottom line turned black recently, and some observers think it’s turned the corner and will soon be cranking ongoing positive cash flows. While Celgene is a leading spender in development partnerships, some analysts believe Ionis (IONS) is the industry’s biggest cash magnet from partnership deals.

The company’s main collaborator, Biogen, recently submitted applications for the earliest treatment for spinal muscular atrophy–the leading genetic cause of infant mortality in the US. If Spiranza notches its widely expected approvals, the pioneering therapy could reach annual sales at or above $2.5 billion. Biogen will market the drug, and if all things pan out, Ionis could pocket about $150 million in milestone payments plus a sweet royalty percentage in the mid—teens.

Buttressed by Biogen’s crack salesforce beating the streets with Spiranza, Ionis most likely would have ample funds to boost its lipid-lowering candidate, volansorsen. Although biotech is risky, Ionis has plenty of candidates in clinical trials which some analysts say makes the company one of the cheapest stocks available right now.

  1. Johnson & Johnson

Whereas Celgene and Ionis might fit the mold for those interested in the quick ka-ching, Johnson & Johnson (JNJ)–despite being the most valuable healthcare company in the world–is still a buy. Why? Simple. J&J has reported annual adjusted earnings growth for 32 consecutive years, and is one of just two publicly traded companies with a spotless triple-A debt rating.

Although associated for decades with famous trade names like Band-Aid, Tylenol and Listerine, the company spends more researching and developing new drugs than any other American firm. Highly diversified to say the least, J&J splits its revenue between its consumer goods, Pharma and medical device segments, and also pays a 2.8% dividend–an absolute windfall in today’s low-rate environment.

Ten different drugs rack up $1 billion or more annually but J&J continues to find ways to grow, earn and invest. Looking ahead, the company expects to submit applications for a dizzying nine new-drug candidates by 2019, all of which could add more than $1 billion in annual revenue. Its myeloma drug Darzalex is in clinical trials, and some analysts believe it could eventually be an annual, $5-billion cash cow.

  1. Ligand Pharmaceuticals

Although 2016 wasn’t exactly a shining year for the healthcare sector, included among some sleepers in the new opportunity category is Ligand Pharmaceuticals (LGND), known best for its many partnering relationships. At last count, Ligand sported over 90 partners and licensees for its drug-development technologies.

The company’s business model is simple: license your technology platforms to other companies so that they can be the one to develop drugs more effectively. Ligand’s business model enables it to generate royalties on any sales of the drugs developed by its partners. To date, Ligand’s most successful products using this approach include Amgen’s multiple myeloma drug Kyprolis and Novartis’s bone-marrow stimulant Promacta.

Ligand currently has over 140 programs in development using its technology platform approach. Four of them are expecting FDA approval, while another seven contenders are in late-stage clinical studies.

  1. Merck

Stalwart performer for decades, Merck’s (MRK) outlook perked up noticeably in August with the unexpected failure of a clinical trial involving a highly flaunted competing med from Bristol-Myers Squibb. That failure elevated Merck’s rival drug, Keytruda, to the position of No. 1 immuno-oncology treatment in the vast market for lung cancer–the main cause of US cancer deaths.

After tacking on almost 5% since the Bristol-Myers’ FDA pothole, Merck still merits attention, trading at around $60, or nearly 16 times projected 2017 earnings of $3.87 a share. The yield is 3.1%. Merck is a topic of Bernstein drug analyst Tim Anderson, who sees Keytruda garnering over $8 billion in annual sales after 2020, up from about $1.5 billion in 2016. “Immuno-oncology should dominate in 2017,” he says. Merck has a broad franchise, including a strong vaccines business and the leading drug for diabetes.

Another category showing potential for Merck is Alzheimer’s. The area has been a cemetery for drug development, underscored by a recent failed clinical trial for an Eli Lilly drug. Merck’s leading Alzheimer’s drug to prevent the buildup of potentially disease-causing plaque in the brain works differently than Lilly’s treatment. The drug, Verubecestat, is furthermost along in its class and some analysts believe it should have Phase 3 trial results in 2017.

  1. Novartis

Novartis (NVS) is a highly diversified drugmaker that recently trades for under 14 times estimated 2017 earnings of $4.97 a share. The Swiss pharmaceutical giant’s US-listed shares trade at around $72 and yield more than 3%. But investors have punished many healthcare stocks because of concerns that Obamacare may be repealed, leading to less demand for prescription medicines.

Novartis is another pick of several analysts, who think it can generate 10% compounded annual growth and earnings per share over the next five years. They argue that Novartis is valued at only a small premium to Pfizer and French drugmaker Sanofi, which have flimsier outlooks.

Admittedly, the US-traded shares of the Swiss-company have fallen 19% since late July. Novartis lost patent protection in 2016 on two blockbuster products: Diovan, a cardiovascular drug, and Gleevec, a cancer treatment. But the company has a large pipeline of promising new drugs in clinical trials, as well as several current blockbusters, including Gilenya, for the treatment of multiple sclerosis, and Afinitor and Tasigna for leukemia.

Novartis gets 25% of its revenue from high-growth emerging markets–among the best of its peers–and the company is less dependent on US pricing increases for higher earnings. It has a large generics business, including one of the best biosimilar operations.

  1. Qiagen

This lab-testing company flies below the radar screen of many investors, especially since sales of its main product–the digene HC2 High-Risk HPV DNA test–tapered off, shrinking the company’s top line. Qiagen (QGEN) says its digene HPV Test is the world’s most proven human papillomavirus (HPV) test for sensitive, early detection of cervical cancer and disease. Third-quarter sales were up 8% (10% using local currencies and factoring out HPV).

Qiagen says demand for it’s GeneReader system for next-generation sequencing is exploding outside the US. Back in September, however, a federal court issued a preliminary injunction against Qiagen, halting the sale of its GeneReader in the US. Illumina had sued Qiagen for patent infringement and requested a preliminary injunction against sales of the GeneReader in June, alleging that the instrument infringes on a patent it holds related to sequencing-by-synthesis technology.

Qiagen CEO Peer Schatz said that the company is, “pursuing all legal means to get the current decision reviewed by the US Court of Appeals for the Federal Circuit as soon as possible.” A trial date for the case is scheduled for November 2017.

Although the GeneReader’s domestic sales is a critical growth initiative, it’s scarcely the only contributor to sales growth. Qiagen’s molecular diagnostics business keeps racking up sales, with the QuantiFeron TB test meeting an aggressive 25% sales growth target. As investors realize how dynamic the company really is, prospects for appreciation in its stock price look strong.

  1. Stryker

Analysts are rediscovering Stryker (SYK)-—another blue-chip stock with a moderate dividend–and saying it should be one of the best healthcare stocks to buy for 2017. The highly diversified medical device maker inked two important buys last year. Stryker first snagged Sage Products, a maker of disposable items used in the intensive care unit, then defibrillator specialist Physio-Control.

The two M&A deals gave a big lift to third-quarter results, and some analysts believe the short- and longer-term trend looks quite promising. Stryker’s sales grew 16.7% in constant currency in the third quarter, but not including Sage and Physio-Control, that stellar number would’ve dropped to just 6.2%.

  1. UnitedHealth

After chalking up a 37% gain in its 2016 share price, the country’s biggest health insurer still looks to be one of the best healthcare issues to buy for this year. UnitedHealth’s (UNH) colossal market cap of $140 billion, mixed with its 1.7% dividend, places it squarely in the prudent investment category. It’s decision to lower dependence on Obamacare makes it even more protected.

UnitedHealth was one of the few big insurers not impressed with the benefits Obamacare posed and took its time testing the waters unlike some of its cohorts. That proved a prophetic decision, and with the forthcoming installation of a new political regime, hell-bent on repealing the Affordable Care Act, the company’s decision to minimize its downside exposure makes it a solid, rational choice–at least for the next 12 months.

  1. Varian Medical Systems

With the future of Obamacare largely unknown at this juncture, companies that could lose customers if Americans are no longer required to have health insurance saw their shares chucked into the dumpster during the fourth quarter. The Affordable Care Act added approximately 20 million newly covered citizens to get treated at the country’s hospitals, in particular, the rural ones. Without those patients, many hospital beds may be unfilled more often, according to Mary Pierson, who co-manages $4.9 billion in mid-cap assets for Fairpointe Capital.

But the big selloff after the presidential election also crushed companies that sell equipment to hospitals, unjustly penalizing players like Varian Medical Systems (VAR), which analysts have assigned an estimated P/E of 18 for 2017. The maker of advanced radiotherapy devices for cancer treatment, Varian collects more than half of its sales–and the bulk of its growth–outside the US, where it should be “unaffected by changes to Obamacare,” Pierson points out.

  1. iShares NASDAQ Biotechnology Index

Although IBB is technically an Exchange Traded Fund (ETF), it trades like a stock. Rather than assuming a company-specific risk that can hammer investors, as happened with Valeant Pharmaceuticals, IBB is a barrel of all biotech and pharma stocks in the NASDAQ composite. Analysts say for those investors seeking the best healthcare stocks in 2017, it’s a good idea to take on some participation in the high-growth biotech space, which some think hasn’t been well represented yet in this particular ETF.

It’s the diversified portfolio of NASDAQ issues that IBB features. And like Johnson & Johnson, IBB isn’t just a conspicuous luminary in the healthcare realm; some analysts think it might be one of the best picks in the whole shooting match.

Disclaimer: All posts are purely my opinion. I am not a financial advisor, so please conduct your own due diligence on any and all stocks mentioned. See “about” page for more legal details.

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