Not every stock went down in 2022. Shares in some the biggest pharmaceutical companies rose in price. If you can make it in a market like 2022, imagine what can happen in 2023 for many top pharma stocks.
What the best pharma stocks have in common is pricing power, patented medicines, big moats and wide margins. They’re also members of Pharmaceutical Research and Manufacturers of America, the trade group that has fought for decades to keep prices high.
Pricing is the key risk for these companies. The Inflation Reduction Act lets Medicare negotiate on prices for the first time. The Biden Administration is already touting a $35/month cap on insulin prices under the law.
But that could just be the start. If drugs cost less under Medicare than with private insurance, patients and plans may demand to be let in on the savings. The government will push drugmakers to compete on price, squeezing margins. Insurers may join them.
The bottom line is that the law will be less-effective than advertised, at least in 2023, with many provisions failing to take effect for years. Thus, the industry has time to adapt, giving investors time to load up on thee top pharma stocks.
Merck (NYSE:MRK) had a spectacular 2022, with its stock rising 44% as the average stock in the S&P 500 fell almost 20%. This brought the market cap of one of the top pharma stocks in the market to $280 billion in early 2023.
Merck is best known for Keytruda, its anti-cancer immunosuppressant. But there’s a lot more to like, according to analysts. It has a COVID-19 pill called Lagevrio. It is also working with Moderna (NASDAQ:MRNA) on a cancer vaccine. To keep growth going, it is buying Imago Biosciences (NASDAQ:IMGO), which is working on blood diseases. Thus, this is one of the top pharma stocks making waves in many areas of the market.
In 2022 Merck saw record sales, higher profits, and promising results in clinical trials. Sotatercept, its hypertension drug acquired with Acceleron in 2021 for $11.5 billion, met the main goal on its latest clinical trial. The company’s early bet on using peptides to help otherwise-toxic drugs reach their targets is paying off.
Merck remains a conservative investment. Its 73 cent per share dividend still yields 2.6%. Its price-earnings ratio of 18-times is not out of line, given 20% top-line growth and 17% profit growth. It even managed a successful CEO transition to Robert Davis.
Technicians like Merck’s chart pattern and none of the 16 analysts following Merck at Tipranks want you to sell it, even at $110/share. In fact, Wells Fargo (NYSE:WFC) recently raised its price target to $125/share.
Eli Lilly (LLY)
Eli Lilly (NYSE:LLY) stock had a stellar 2022, rising nearly 33%. Its market cap entering January was about $347 billion. The company has a large lead in treating diabetes that is leading to breakthroughs in weight loss.
Lilly may look overvalued with a price-earnings multiple of 55-times, and a 2022 growth rate of under 10%. That said, its best seller right now is Trulicity, a diabetes treatment that brought in nearly $6.5 billion last year. Past hits include Prozac for depression, Zyprexa for psychosis, and Humulin, a bio-engineered form of insulin. It is also delivering a long-acting insulin called Rezvoglar, which would be interchangeable with Sanofi’s (NYSE:SNY) Lantus. This could drive down the cost of diabetes care.
But Lilly’s future looks even better than its past. Mounjaro, originally created for diabetes as tirzepatide, may find new sales as an obesity treatment. This would make it what our Louis Navillier calls a “mega blockbuster.” Bank of America (NYSE:BAC) thinks Mounjaro could ring up sales of $50 billion. That’s more than Pfizer’s (NYSE:PFE) COVID vaccine, Comirnaty.
Lilly is already expanding its manufacturing capacity in expectation of a quick approval. Lilly has another drug called retatrutide, about to go into Phase 3 testing, that could be even more effective. The drug works by mimicking a hormone that drives hunger, and by causing food to clear from the stomach more slowly.
Small wonder that 11 of 13 analysts at Tipranks want you to buy LLY stock, with a price target of $400, 10% above its current level.
Amgen (NASDAQ:AMGN) stock managed to gain 17% in 2022, while the average S&P stock lost 20%. This is among the most valuable pharma stocks out there, with a market cap of approximately $139 billion, a price-earnings ratio 21-times, and a fat dividend yield of 3.2%
Amgen’s best seller, Enbrel, is an anti-cancer drug that had $6 billion of sales in a single year. It also sells Prolia, a shot for strengthening bones, an auto-immune drug called Otezla for psoriasis and arthritis, and an osteoporosis treatment called Xgeva. All are doing better than expected, and I expect Amgen to remain among the top pharma stocks for some time to come.
But the real excitement surrounds the pending purchase of Horizon Therapeutics (NASDAQ:HZNP) for nearly $28 billion. Horizon makes drugs for rare autoimmune and inflammatory diseases. Its best known drug is Tepezza, used to treat thyroid eye disease.
Each of Horizon’s drugs may have relatively modest sales. Tepezza had less than $500 million last year. But rare disease drugs have an easier time winning approval, and pricing is seldom an issue. To some analysts, this makes investing in Amgen a “no-brainer.” They point to the $11.7 billion it had in cash at the end of September, and operating cash flow of over $9 billion, which makes its acquisitions affordable.
This view is not universal, however. Bears point to $37 billion in long-term debt even before the Horizon purchase, which came after Sanofi and Johnson & Johnson (NYSE:JNJ) both expressed interest. Four of the company’s 16 analysts at Tipranks are telling clients to sell it.
Amgen could also get a boost if it wins its effort to revive patents on its biologic Repatha, and block the sale of competing drugs from Sanofi and Regeneron (NASDAQ:REGN). The issue is how narrowly patents must be written and how different competing drugs must be to avoid violating them.
Bristol-Myers Squibb (NYSE:BMY) stock had a solid 2022, up over 16%. The company also hiked its dividend in December to 57 cents, meaning it now yields over 3.1%.
The company’s best-selling drugs are Revlimid for multiple myeloma, Eliquis, a blood thinner, and Opdivo, which competes with Merck’s Keytruda as an anti-cancer immunosuppressant. All three, however, go off-patent later this decade.
The company bought Celgene (makers of Revlimid) for $74 billion in 2019, which kept the stock’s performance down until 2022. The year was helped by $15 billion in stock buybacks to support the stock price. By September, the company still had $9.1 billion in cash and equivalents on its books.
BMY got good news from regulators in 2022, who approved three new Bristol-Myers drugs, the most from any maker. These include a melanoma drug called Opdualag, which will help extend the patent life of Opdivo, Camzyos for a genetic heart disease that thickens the muscle and slows blood flow, and Sotyktu, an oral drug for severe psoriasis to compete with Abbott Laboratories’ (NYSE:ABT) Humira. Each are expected to become a $4 billion franchise over time.
Some analysts are worried about expiring patents and slowing approvals, turning negative on Bristol-Myers. Most of the 11 following it are in the hold camp, with three saying buy and one saying sell.
Rounding out this list of top pharma stock to buy is Regeneron (NASDAQ:REGN). The company had a decent 2022, with REGN stock rising about 15%. This brought the company’s market cap to $78.5 billion, despite it having no dividend. Regeneron’s price-earnings ratio is 15-times.
I have long been a fan of Regeneron thanks to their VelociSuite, which models what potential drugs might do on mice. I think having a system for drug discovery delivers more long-term value than just having a hit drug.
While Regeneron is losing patent protection on Eylea, which fights macular degeneration, it has new blockbusters in Dupixent, an autoimmune drug, and Libtayo, which competes with Merck’s Keytruda.
Regeneron was thought to be a COVID play in 2021 with its REGN-COV, but a cut in government funding recently caused it to cut four clinical trials of the drug. It also recently dropped work on medicines for chronic pain and cat allergies.
One area where Regeneron is not cutting back is on obesity, where it’s working with a gene called GPR75 that can protect people from getting fat. It is trying three different methods for developing a drug in this area.
Research cutbacks led to a bad third quarter, with sales and profits both down from a year earlier. This led analysts to downgrade their outlook on Regeneron stock. At Tipranks, only 7 of 13 want you to buy it, and 1 is telling clients to sell.
While Regneron may look down now, I still think it’s the best of the five pharma stock studied here for the long term.
On the date of publication, Dana Blankenhorn held long positions in MRNA and BAC. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Living With Moore’s Law, available at the Amazon Kindle store. Write him at [email protected] or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.