Will Healthcare Take Care of Your Portfolio

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

During the past decade, healthcare has been one of the most stable and consistent performers among all industries. According to IMS, global spending on healthcare during 2011-2016 is expected to grow at a CAGR of around 6%. The volume growth in emerging markets for pharmaceutical companies and continuous uptick in medicine spending in developed countries should drive global growth.

Here are three health-care companies ready to capitalize on growth opportunities by looking for acquisitions and regulatory approval for their drugs, which will, in-turn, generate further growth opportunities.

How will the acquisition strategies and approvals drive the growth of these companies further and build investors' faith?

Regulatory approval for the drugs should enhance future revenue

After receiving FDA and European Union approval for its new anti-clotting drug, “Eliquis,”  Pfizer (NYSE: PFE) and its partner, Bristol-Myers Squibb, recently announced that the Supplemental New Drug Application for this drug has been accepted by the FDA for review. When taken, this drug helps to prevent venous thromboembolism, or VTE, and reduces the chance of deep vein thrombosis, or DVT, a blood clot in veins, and pulmonary embolism, a blood clot blocking the main artery of the lung, in adult patients who have undergone hip or knee replacement surgery.

Pulmonary embolism is dangerous and can be fatal. VTE is prevalent in nearly 40%-60% patients who have undergone orthopedic surgery. Pfizer expects the Eliquis alliance will build its presence in the global market.

In November 2012, Pfizer received the approval for “tofacitinib” to treat rheumatoid arthritis, or RA, patients in the U.S under the brand name “Xeljanz.” This drug recently received approval in Switzerland, the first European country for Xeljanz. Looking at the further growth opportunities, it plans to launch this drug in Japan this month with approval from the Japanese Ministry of Health, Labor, and Welfare.

Xeljanz is under regulatory review in more than 30 other countries. To enhance its market and awareness of this drug in Japan, the company partnered with Takeda Pharmaceutical Company. Moreover, RA affects more than 23.7 million people globally and Pfizer expects to grab this opportunity, boosting Xeljanz sales to $176 million this year and $482 million next year from $6 million last year.

Acquisition generating further growth opportunities

Johnson & Johnson (NYSE: JNJ) recently announced that it will acquire Aragon Pharmaceutical, a pharmaceutical discovery and development company focused on developing drugs to treat hormone-driven cancers, for $1 billion. With this acquisition, Johnson & Johnson will gain control of Aragon’s most advance compound, ARN-509, which will help it further enhance its prostate cancer drug development.

ARN-509 is the second-generation androgen receptor, which is currently under Phase-II development, and will help JNJ's ZYTIGA® to treat prostate cancer patients more efficiently. Prostate cancer is the main area of focus for Johnson & Johnson, and by adding ARN-509 in its portfolio, it expects total revenue of $1.53 billion this year from $961 million last year.

The company's immunology segment reported year-over-year revenue growth of 16.8% to $2.24 billion, led by “Remicade,” which displayed growth of 9.8% to $1.68 billion in the second quarter. The other drugs “Simponi” and “Stelara” have shown strong growth of 40% and 50%, respectively. Remicade has performed well in Canada and emerging markets, where its revenue grew 20%. Looking at this growth, it is further planning to enhance its market share in emerging markets.

The company has also filed for label extensions, which will provide further growth opportunities. It signed a new distribution agreement for these drugs with Merck (NYSE: MRK), giving up marketing rights in 150 markets including Canada, Central and South America, and the Middle East and North Africa, or MENA, region. With this agreement, the immunology segment expects year-over-year revenue growth of 15.5% to $9.09 billion, with adjusted EPS of $5.50 this year from EPS of $5.11 last year.

Blockbuster drugs leading from the front

Merck’s Gardasil drug, used to treat cervical cancer, reported year-over-year growth of 37% to $390 million in the first quarter. The continuous uptake in the U.S. and other international markets propelled this strong performance. The U.K. is using it in the Human Papillomavirus Quadrivalent, or HPV, vaccination program across all its schools. With wide acceptance and the ability to treat cancer patients more effectively, it will help Merck gain competitive advantage over GlaxoSmithKline's “Cervarix” in other countries also.

Furthermore, the International Agency for Research on Cancer, reported that this cancer virus is three times more prevalent in men than women, and men are four times more likely to develop oropharyngeal cancer. The gardasil vaccine received approval from regulatory bodies to vaccinate men also. Therefore, it expects report year-over-year revenue growth of 30% to $2.12 billion this year and $2.34 million next year.

The company's animal healthcare product segment reported year-over-year revenue growth of 2% to $840 million in the first quarter ended in March 2013. Its new product “Activyl” acted as the main driver for this growth, which treats and prevents fleas and ticks in dogs and cats. With a rise in animal-related diseases, like swine flu and bird flu, Merck is continuously focusing on developing new improved drugs to cure these diseases.

It will likely increase research and development, or R&D, expenses to develop new drugs as the percentage of gross profit increased to 17.3% this year from 15.3% last year. This enables the company to monetize the opportunities present in animal healthcare.

Conclusion

With increased health concern and spending on the treatment of various diseases, the companies in this industry are looking to enhance their foothold by introducing new and improved drugs. Pfizer expects to enhance its revenue with approval from regulatory bodies for its Eliquis sNDA and Xeljanz drugs. Johnson & Johnson anticipates grabbing future growth opportunities with its acquisition of Aragon Pharmaceutical and growth of its immunology drugs. Merck’s blockbuster drugs should boost its revenue and offer greater opportunities in the future.

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Madhukar Dubey has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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