1 Perfect Stock to Invest in the Pharmaceutical Industry

By George Budwell, Cory Renauer, and Brian Feroldi Markets Fool.com

The pharmaceutical industry remains one of the fastest growing fields due to an aging global population and an unprecedented level of innovation that's bringing numerous game-changing medicines from the lab to the market.

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In an effort to get investors in the best position possible to take advantage of this rising tide, we asked three of our healthcare contributors which pharma stock they think stands apart from the crowd. In response, they recommendedPfizer (NYSE: PFE), Johnson & Johnson (NYSE: JNJ), and Roche (NASDAQOTH: RHHBY) as their top choices to gain exposure to this high-flying industry.Read on to find out why.

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This pharma giant has been avoiding major pitfalls and hitting home runs

George Budwell(Pfizer): The name of the game in pharma is having an efficient Research & Development engine, and the pharma giant Pfizer has that in spades. Unlike most of its peers, which arguably take a shotgun approach to maximizing R&D output, Pfizer carefully evaluates drugs at each stage of their development to critique both their viability as product candidates and their market opportunities.

The drugmaker's decision to discontinue the clinical program for its high-profile cholesterol drug bococizumablast year is a prime example. Given thatAmgen's Repatha and Sanofi and Regeneron's Praluentwere already on the market,bococizumab was facing a saturated marketplace that simply didn't look like it could support a third PCSK9 inhibitor. And with Amgen recently winning a critical patent case barring Praluent from the U.S. market for up to 12 years, Pfizer's decision to cut its losses on bococizumab looks like a stroke of genius in hindsight.

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And that's the key difference between Pfizer's approach to R&D and that of other major drugmakers like Eli Lilly, which often stubbornly advance weak clinical candidatesthat do little more than waste billions of dollars and erode shareholder value. So if you're looking for a top flight pharma stock, this highly efficient drugmaker should definitely be on your list this year.

A history of success

Brian Feroldi(Johnson & Johnson): When I think of a "perfect" stock to invest in the pharmaceutical industry, I can't help but think of Johnson & Johnson. This company sports a history of winning that is so long and impressive that you'd be hard-pressed to find a better business anywhere in the world.

For evidence of just how strong this company has become, consider this: J&J has increased its adjusted earnings for 32 years in a row. That's atime period that spans multiple recessions. Better still, J&J has raised its dividend for 54 consecutive years. Those numbersare about as good as it gets.

Despite its long history of winning, I think that J&J stands a great chance of keeping its string of earnings growth alive. My confidence comes from the company's strong pipeline. Management has touted that it plans on sending 10 new potential blockbuster drugs in for regulatory review between 2015 and 2019. As those new drugs join the company's current lineup of hit drugs -- which includes hits like Remicade, Imbruvica, Xarelto, and Stelara -- I think investors can bank on the company producing steady growth in the years to come.

Currently, Johnson & Johnson stock can be purchased for about 20 times trailing earnings. While that's not a dirt cheap valuation, it does represent a discount to the average company in the S&P 500. That makes me believe that right now is a fine time to consider adding this perennial winner to you portfolio.

Leading the league

Cory Renauer (Roche): A deluge of "breakthrough therapies" flowing from this company's pipeline make it my pick for the perfect pharmaceutical stock. The FDA began awarding the designation in 2013 to experimental drugs exhibiting potential to vastly improve on standard (or non-existent) treatments of serious diseases.

While the designation is intended to expedite the application process for therapies that significantly benefit patients with unmet needs, it's also an unofficial yardstick for measuring the level of innovation a pharmaceutical company is capable of. As of last October, Roche had earned 14 breakthrough designations. That's more than any of its peers, and twice as many as America's largest pharmaceutical company, Pfizer.

Another area where Roche leads its peers is in diagnostics, which is driving development decisions that might not have been made otherwise, particularly in the rapidly changing oncology space. Precision medicine is more than a buzzword, but it requires using diagnostics to match the right therapies -- and their combinations -- to the right patients. With a diagnostics segment that reported $8.25 billion in revenue during the first nine months of 2016, Roche is positioned betterto ride this trend than any other pharmaceutical company.

Roche's flagship new immuno-oncology therapy, Tecentriq, which prevents tumor cells from shutting down an immune system attack, is currently in 29 clinical trials as part of a combination. Tecentriq is already gaining popularity as a solo therapy for some forms of bladder and lung cancer, but peak annual sales of the drug could pass $3 billion, depending on how large its addressable patient population grows through potential combination studies.

A dividend that has risen (in Swiss Francs) for 31 straight years is the cherry on top. With an innovative pipeline bursting with exciting candidates, Roche could keep boosting those payouts for many more years to come.

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Brian Feroldi owns shares of Regeneron Pharmaceuticals. Cory Renauer owns shares of Johnson and Johnson. George Budwell owns shares of Pfizer. The Motley Fool recommends Johnson and Johnson. The Motley Fool has a disclosure policy.