Top Pharmaceutical Stocks to Buy for 2015

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It has been tough lately for big pharmaceutical stocks to overcome the headwinds tied to patent expiration on some of the world's best-selling medicines. As a result, pharmaceutical stocks haven't been as rewarding to investors as they have been in the past. However, that doesn't mean that there aren't some intriguing pharmaceutical stocks that investors may want to concentrate on in 2015. For instance, these three pharmaceutical companies are expected to post solid earnings growth over the coming year that may make them worthy of inclusion in portfolios.

1. Valeant Pharmaceuticals isn't your typical pharmaceutical company. Rather than spending big bucks on research and development and exposing itself to the risk of costly pipeline failures, the company prefers to acquire companies that are already marketing drugs with sales that are growing.

Recently, Valeant caught a lot of press for its failed acquisition of Botox maker Allergan, but despite losing out on Allergan, there's still plenty of reasons that Valeant's shares could head higher next year.

For example, the company's growth through acquisition strategy is fueling substantial top- and bottom-line increases. In the third quarter, the company's sales were up 33% thanks in part to acquisitions, but it wasn't just deals that drove results higher. Organic growth from products purchased more than a year ago was strong, too, increasing 19% from last year. Revenue from the company's top sellers increased most quickly, with sales of its 20 top products growing by 32% year over year. That growth led the company to bump up its EPS outlook for 2014 from at least $7.90 to at least $8.22 and to issue guidance for EPS of $10 in 2015 -- assuming no dilutive acquisitions occur.

That's pretty compelling bottom-line growth, but growth could be even better if the company leverages additional cost cuts from previous deals to pay down debt and reduce interest payments and buy back stock. Last month, Valeant announced plans to repurchase up to $2 billion in notes, stock, and other securities. If Valeant follows through with those purchases, then investors may be rewarded with a higher stock price next year.

2. Jazz Pharmaceuticals has also been an avid acquirer, and as a result the company is one of the fastest-growing pharmaceutical companies. Thanks to a string of deals, including the $1 billion purchase of Gentium earlier this year, Jazz's trailing-12-month sales have grown from around $100 million to more than $1 billion, and its market cap has increased from about $1 billion to $10.6 billion since 2011.

Jazz's growth has come primarily thanks to three high-growth medicines, including the narcolepsy drug Xyrem, an orphan drug that the company acquired in 2005. Sales of Xyrem jumped 33% to $204 million during the third quarter. In addition to Xyrem, Jazz also sells the acute lymphoblastic leukemia drug Erwinaze, which carries a $150,000-per-year price tag, and had sales of $52 million in the third quarter, up 18% year over year. Additionally, sales of Defitelio, a treatment for rare liver disease that the company got when it bought Gentium, posted sales of $18.9 million last quarter, up from $13.1 million a year ago. The potential for those drugs to keep growing has analysts predicting that Jazz will report earnings per share of $10.14 in 2015, up from $8.29 this year, which could mean that shares will move up again in 2015.

3. Valeant may have missed out on buying Allergan, but Actavis didn't. Actavistrumped Valeant with a $66 billion bid for Allergan that won over both Allergan's board and Allergan's biggest shareholder, Bill Ackman's Pershing Square Capital Management.

That purchase gives Actavis Allergan's top-selling blockbuster drug, Botox, a set of successful ophthalmology drugs, and a pipeline of promising therapies. It also gives Actavis an opportunity to cut costs and boost shareholder-friendly profits. Once the deal is completed early next year, Actavis thinks it will be able to eliminate $1.8 billion in expenses on top of the $475 million in cuts that Allergan had previously planned.

Since Actavis has successfully integrated other big mergers, it wouldn't be shocking if the company was able to over-deliver on its sales and cost savings forecast. In the past two years, Actavis has acquired women's health drugmaker Warner Chilcott and central nervous systems drugmakerForest Labs.Those deals have helped propel Actavis' sales from about $4 billion in 2012 to $11.8 billion over the past 12 months. Thanks to sharp pencils, Actavis' free cash flow has more than doubled in the past year, too. Ongoing sales success for its existing drugs, upside tied to its deal to acquire Allergan, and four FDA decision dates on Actavis' drugs between now and March suggest that 2015 could be another good year for investors, particularly if Actavis delivers on analysts' EPS estimate of $16.61 next year, which would be 22% higher than EPS expectations are for this year.

Common threadValeant, Jazz, and Actavis are all growing pharmaceutical companies that aren't dealing with the patent headwind facing better-known big pharmaceutical stocks, such as Pfizer. Instead, they're leveraging balance sheets to acquire other drugmakers with existing products that are growing quickly and pipelines that offer additional opportunity. While this acquisition strategy may drive sales, earnings, and shares higher, it also means that these companies have little room leftover to send money back to shareholders. For example, none of the three pay their shareholders dividends. As a result, while the growth opportunity for these pharmaceuticals stocks may mean that they deserve a spot in portfolios, they may not be right for everyone, including income investors.

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Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. Todd owns Gundalow Advisors, LLC. Gundalow's clients do not have positions in the companies mentioned. The Motley Fool recommends and owns shares of Valeant Pharmaceuticals. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

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