Five Super Ideas in the Healthcare Sector

Masam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It will not be wrong if I state that healthcare is the most volatile sector in the world of equities. Drugs come and go. Some are rejected. Others are approved. Hence, the healthcare stocks keep on moving on such news. This sector is the absolute opposite of the transportation sector, which is/has been/will be transporting goods/people from one place to another and hence lacks the sense of innovation. I have picked out five healthcare stocks that deserve special attention from investors:

Eli Lilly (NYSE: LLY)

Bears have been chanting against the company given the recent heavy offloading of shares by insiders. Though Eli Lilly’s story is still evolving with multiple challenges, the outlook looks materially better with improving view of pipeline, a positively revised view on Alimta and long-term expense guidance provided by the company. The DCF-derived target price implies ~29% upside from current levels. Moreover, a dividend yield of 3.6% seems attractive. On the pipeline front, key programs to watch in 2013 include oncology asset ramucirumab, diabetes drug dulaglutide and autoimmune drug baricitinib.

Merck (NYSE: MRK)

Despite recent Tredaptive setbacks, I remain positive on Merck due to the favorable key catalysts risk/reward in 2013 (IMPROVE-IT readout, odanacatib detailed phase 3 data release, anti-PD-1 data, DEFINE extension insights, suvorexant FDA action date, and further insights on BACE inhibition for Alzheimer’s Disease). The company’s drugs to cure diabetes, Januvia and Janumet, have brought immense success to the company. These drugs enjoyed great popularity in the US and Japanese market. Moreover, the stock looks reasonably cheap. The stock is currently trading at a cheap forward multiple of 11x which is well below the average P/E of 19x for the healthcare sector. Also, the stock pays an attractive dividend yield of 4.16%.

Forest Laboratories (NYSE: FRX)

FRX continues to be a multi-faceted product overhaul story. Investor interest in the stock should improve over the next 12 months as new product performance becomes more visible. Moreover, takeout is a possible back-up scenario if the execution underperforms expectations. It is quite evident that 2013 includes multiple catalysts that could help improve investor perception (phase 3 data on combination products; FDA approvals for levomilnacipran and cariprazine in calendar 2H13).

Regeneron (NASDAQ: REGN)

One can figure out both near-term and long-term drivers for the stock. The company is expected to maintain its momentum in improving its bottom-line and will continue to experience increased profitability, extended growth of the Eylea franchise, and increased attention for a product in its pipeline with blockbuster potential (REGN727). Additionally, looming regulations over compounding pharmacies could restrict off-label use of a key competitor in the AMD (Medical Aid and development) space, creating the potential for further Eylea revenue growth.

Seattle Genetics (NASDAQ: SGEN)

Among small cap biotechnology companies, Seattle Genetics remains the top investment idea based on its lower risk profile (low clinical risk), proprietary sales of Adcetris, robust expansion opportunities for Adcetris, and deep pipeline with industry leading technology. This company is one of the very few pure play antibody companies.

Foolish Bottom Line

I believe these five stocks are the best picks in the healthcare sector. Some of them are attractive because of their attractive product pipeline. However, others seem good investments based on their compelling valuations.


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