The Highest-Yielding Drug Stocks

By Markets

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Dividend stocks lay the foundation that solid retirement portfolios are built upon. Historically, though, the healthcare sector hasn't been a big contributor for income seekers. Instead, drug stocks are more commonly associated with reinvestment into research and development, and spending tied to acquisitions. But times are changing, and profitable drug stocks are now, more than ever, emphasizing capital returns to shareholders as a means of attracting long-term investors.

Though not all drug developers offer a dividend -- which makes sense since the majority of drugmakers are losing money -- those that do could be among the most attractive to dividend seekers. Drugmakers typically possess incredible pricing power, and having a laundry list of key advantages seemingly ensures their ability to raise prices at a quicker pace than the national inflation rate. This means, in many instances, that drug stocks can offer some of the safest above-average dividend yields.

The highest-yielding drug stocks

What drug stocks should you consider adding to your income portfolio? Why not start with the highest-yielding drug stocks.

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GlaxoSmithKline: 5.1% dividend yield

For a few years it looked as if U.K.-based GlaxoSmithKline (NYSE: GSK) would struggle to keep its superior dividend yield in place. GlaxoSmithKline (better known as GSK) lost patent protection on blockbuster COPD and asthma drug Advair years ago, and it's been a countdown as to when a generic entrant would hit the market. That entrant is expected in the coming one-to-three years, meaning a steady decline in sales and pricing power for GSK's lead drug.

The good news for GSK is that it and its partner, Innoviva (NASDAQ: INVA) (formerly Theravance) have introduced a number of next-generation, long-lasting, inhalable COPD- and asthma-focused medications that could more than counteract the falling sales in Advair. All of GSK's and Innoviva's next-generation respiratory products generated greater than 100% year-over-year growth in the second quarter, with Breo Ellipta, and to a lesser extent Anoro Ellipta, putting their coverage issues in the rearview mirror.

GSK has also benefited from its majority stake in ViiV Healthcare. ViiV is responsible for bringing HIV therapies Tivicay and Triumeq to pharmacy shelves, with both therapies combining for $1.5 billion in sales during the first-half of 2016. As long as new drug launch growth continues to outpace patent losses, GSK's 5% dividend yield should remain safe.

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Sanofi: 4.4% dividend yield

Like GSK (and practically every other Big Pharma), Sanofi (NYSE: SNY) has struggled with the loss of patent exclusivity on key drugs. Most notably, sales of blood-thinner Plavix fell 22% in the second quarter from the prior-year period. However, Sanofi's dividend doesn't appear to be compromised thanks to its focus on rare-disease and specialty drugs, and its multiple collaborative opportunities.

Sanofi has been a major beneficiary of the pricing practices associated with specialty and rare-disease therapeutics. In the case of rare-disease drugs, there's rarely much in the way of competition, and orphan drug designations usually keep would-be copycats at bay. Likewise, drug inflation among specialty drugs hit 9.2% last year according to research firm Truveris, signaling strong pricing power for Sanofi. In particular, sales of oral multiple sclerosis drug Aubagio wound up growing by 61% in Q2 2016 from the prior-year period.

Sanofi is also benefiting from its collaborations, even if they all haven't worked out as planned (ahem, MannKind). Most notably, Sanofi's partnership with Regeneron Pharmaceuticals (NASDAQ: REGN) looks as if it'll yield two new blockbusters. The phase 3 SARIL-RA-MONARCH study demonstrated superiority for experimental sarilumab over AbbVie's top-selling drug in the world, Humira, in patients with rheumatoid arthritis. The duo of Sanofi and Regeneron could also be sitting on a gold mine with PCSK9 inhibitor Praluent. If long-term cardiovascular data leads to superiority over standard-of-care cholesterol-lowering medications, the high price for Praluent and competing PCSK9 inhibitors could be justified.

Sanofi is a name income seekers should give a closer look.

Image source: Pfizer.

Pfizer: 3.6% dividend yield

Drug giant Pfizer (NYSE: PFE) is another name that income seekers could wind up latching onto for good reason.

Aside from fighting off the patent cliff and losing exclusivity on the best-selling drug of all-time, Lipitor, Pfizer has introduced a number of fast-growing therapies recently, and its pipeline contained well over seven-dozen clinical-stage and registration-stage therapies as of Feb. 2016.

Among its newest therapies, advanced breast cancer drug Ibrance could be the most exciting. In the phase 3 PALOMA-1 study that led to Ibrance's approval by the Food and Drug Administration, Ibrance led to a near-doubling in progression-free survival and an improvement in overall survival. Based on its second-quarter earnings results, Pfizer's Ibrance generated $514 million in worldwide sales, which is pretty impressive for only its fourth full quarter on pharmacy shelves. Assuming Ibrance can be expanded to new label indications, it could grow into a $4 billion-plus drug for Pfizer.

Pfizer also has a unique portfolio of biosimilar drugs in development. These biologic drugs, which have similar efficacy to branded therapies, could revolution the drug industry by undercutting branded-therapy pricing. Though the competition could be something fierce, Pfizer has deep enough pocketbooks to generate substantial cash flow from its biosimilar franchise.

M&A is another major growth opportunity for Pfizer given its recent acquisitions of:

  • Hospira, which has helped boost its biosimilar research and established products franchise.
  • Anacor Pharmaceuticals, which gives Pfizer access to experimental atopic dermatitis drug crisaborole.
  • Medivationand its prostate cancer drug Xtandi.

All indications are that Pfizer will continue to be generous with its dividend policy.

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One word of caution

As a final word to the wise, please ensure that you aren't buying dividend stocks solely based on yield or a stock screener. Yields can rise because a company chooses to increase its payout to shareholders; but they can also rise because a company's share price is falling due to problems with its business model. You have to be willing to look beyond a company's yield when examining if it's right for your income portfolio.

For instance, PDL BioPharma (NASDAQ: PDLI), an owner of royalty assets in the biotech space, had a dividend yield of more than 6% until August, which would have been good enough to top this list. However, most of its Queen patents, which accounted for the vast majority of its revenue, expired in December 2014. PDL BioPharma was spared an immediate drop in revenue since warehoused product bearing its technology was sold over the next six quarters. With those six quarters having passed, the company is now exposed to the dramatic drop in sales and profits tied to its Queen patent expirations, prompting PDL to terminate its quarterly dividend in early August. Thus even though stock screeners show PDL with a large dividend yield, PDL's actual yield is now a big goose egg (0%).

Make sure you do your homework before diving headfirst into a high-yielding drug stock.

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Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.

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