Investors have certainly had an easy time with the stock market of late. It seems like good news comes out every day causing another surge in share prices. The S&P Depository receipts (SPY) has returned just under 9% over the past 3 months as the chart below shows.
And while a 9% return over a 3 month period is probably satisfactory for almost all, the pharmaceutical industry has performed even better. The iShares Dow Jones U.S. Pharmaceuticals Index Fund (IHE) is a popular ETF that measures the overall performance of this space. As the chart below shows, the space has appreciated by more than 9.5%.
Pharmaceuticals stocks have been boosted by strong earnings, strong dividends, an aging population, and new medical developments. Consider the following:
- The U.S. currently has an aging population with a large increase in health problems such as obesity and cancer. The IMS Institute for Healthcare estimates that worldwide drug spending will increase by more than 20% by 2016.
- Drug makers have been developing new drugs and treatments at a frequent rate. Johnson & Johnson (JNJ) recently developed a product called Zytiga, which will be used to treat prostate cancer. Celgene (CELG) recently developed a product called Abraxane, which will be used to treat pancreatic cancer. And obesity, one of the leading causes of health problems globally, is currently being treated by several companies including Vivus (VVUS) and Arena Pharmaceuticals (ARNA).
- On average, pharmaceutical companies generate profit margins of between 20% and 30%.
In light of the above, it certainly is worth looking at this industry. But which stocks should investors consider?
Companies Worth Considering
Celgene Corporation (CELG) has been on an absolute tear over the past year. As the chart below shows, Celgene has appreciated by roughly 83% during the past 52 weeks.
The stock has appreciated because of new drug developments and strong earnings reports. As mentioned above, one of Celgene’s most anticipated drugs is Abraxane, used in advanced pancreatic cancer. On Thursday, the U.S. FDA granted priority review for Abraxane in combination with gemcitabine for the first-line treatment of patients with advanced pancreatic cancer. Should Celgene receive approval, this will provide a big lift to the company.
Additionally, Celgene reported first quarter earnings on April 24, 2013. The results were very encouraging. They also provide a roadmap to how the company can continue to outperform well into the future. For the first quarter 2013, Celgene’s revenue totaled $1.46 billion, a 15% increase over the same period in 2012. Some highlights include the following:
- REVLIMID sales for the first quarter increased by roughly 16% to $1 billion and were driven by overall market share gains and increased duration of therapy.
- VIDAZA first quarter sales increased by roughly 10% to $204 million. Sales were driven by increased demand in the U.S., Europe and Latin America.
In addition to strong earnings, the company also provided future guidance. Total net product sales are expected to increase by approximately 11% year over year to $6 billion. REVLIMID net product sales are expected to increase by approximately 10% year over year to $4.2 billion. Adjusted EPS guidance was raised to a range of $5.55 to $5.65 from a range of $5.50 to $5.60.
Clearly Celgene has performed well and expects to perform well going into the future. Another pharmaceutical company that has caught my attention is Assured Pharmacy (APHY). Assured Pharmacy, Inc., is a growing chain of specialty pharmacies that provide advanced prescription services to a diverse array of medical professionals and their patients. Assured Pharmacy is committed to providing these physicians and patients with a better prescription process. This enhanced process is achieved by blending advanced prescribing technologies with focused pharmacology.
Much like Celgene, Assured Pharmacy has experienced strong earnings and significant share price appreciation. As the chart below shows, shares have increased by approximately 53% over the past 90 days. 
This strong move coincides with Assured Pharmacy’s recent announcement that it plans to pursue a major expansion strategy, including opening two additional stores in Denver and Boston. Following the model of Assured’s successful store opening in Kansas last year, the Denver and Boston stores will open with the support of physician groups. With a total cost under $300,000, the Kansas store was EBITDA positive in its sixth full month of operations and has a current annualized revenue run rate of $4 million. Assured also plans to open additional stores in the future given that it can do so with a minimal increase in corporate cost structure.
In addition to the above, the company has several near-term catalysts on the radar:
- The company has a backlog of patients waiting to begin using Assured that can double the patient base of existing stores. The company is actively raising capital to complete this.
- The company is creating strategic relationships with manufacturers to assist them with the distribution of their new products. This should result in significant revenue increases.
- The company expects to uplist to the Nasdaq or AMEX
Clearly Assured is on the right path. The stock price has appreciated significantly and the future catalysts are setting the stage for future appreciation as well.
Conclusion
Pharmaceutical stocks have had a strong run thus far in 2013 and over the past year. With an aging population that needs medication, companies that are willing to spend money in R&D to develop products for new treatments, and a healthcare plan that will soon be nationalized, investors should strongly considering participating in this industry.