The best pharmaceutical stocks to buy in 2017 are set to cash in on the explosive spending growth in the sector. By 2025, spending on pharmaceuticals is expected to reach $615 billion in the United States, according to the Centers for Medicare & Medicaid Services. That's almost double the 2015 spending level of $310 billion.
We're already seeing that growth have a major impact on pharmaceutical stocks. Since Jan. 30, the SPDR S&P Pharmaceuticals ETF (NYSE: XPH) has climbed 9.4%. During the same span, the Dow is only up 5.3%.
However, not all of the pharmaceutical companies are worthy investments. You can't just pick any pharmaceutical stock and expect it to outperform the market.
To help readers find the best picks, Money Morning Biotech Investing Specialist Ernie Tremblay has developed a proven system to discover the pharmaceutical companies to invest in. His most recent pick, which we'll show you in just a minute, is up almost 55% so far this year. And that's just the start for this pharma stock.
Plus, all three of our pharmaceutical stocks to buy today have passed his five "must-follow" guidelines…
How to Find the Best Pharmaceutical Stocks to Buy in 2017
Tremblay has five guidelines for vetting pharmaceutical stocks…
Guideline No. 1: Strong Pipeline
The first step is finding companies with strong drug pipelines. Ideally, the companies should have several advanced-stage drugs being tested (phase 2 or later). This will give you the best odds that the company will get FDA approval for at least one of them.
Guideline No. 2: Safe and Effective Drugs
The second guideline may seem like a no brainer, but it is often overlooked. Make sure the company has safe and effective drugs. You won't know if they are safe and effective until after phase 2 trial results have been published. Don't invest in phase 1 drugs. They may seem like they have a lot of potential, but they are not proven effective.
Along with making sure the drugs are effective, avoid treatments that specifically target cancer, Alzheimer's, or inflammatory bowel disease at least until the company publishes phase 3 data.
These drugs start out with a lot of promise, but many are never approved. The National Cancer Institute says that for every 20 treatments that start clinical trials for the treatment of cancer, only one gets approved by the FDA. That failure rate is four times higher than general treatments, where one in five makes it to FDA approval, according to Tremblay.
Guideline No. 3: Cash Reserves and Burn Rate
The third guideline is finding companies with plenty of cash on hand. Most pharmaceutical companies don't make a profit, so you need to target companies that have the cash on hand to fund operations.
The way you check the cash on hand is through the burn rate.
The burn rate is how much money the company spends in a month. It is found by adding the cash flow from operations and the capital expenditure. Then, you divide by three if the numbers you used were for the quarter, or by 12 if you used annual numbers.
To determine how long the cash on hand will last, find the last cash-on-hand number and divide it by the burn rate. This will tell you how many months until the company runs out of cash. Ideally, you want to make sure the company has about a year's worth of cash on hand. That will allow it to continue operating smoothly while looking for new funds.
Guideline No. 4: Patents and Market Exclusivity Grants
Tremblay's fourth guideline when investing in pharmaceutical stocks is to make sure the new treatments are protected. That means they have multiple patents that cover the manufacturing process, molecular content of the new drug, the pill design, absorption rates, etc. The more patents, the better.
Another form of protection for companies is market exclusivity grants. These are given by the FDA once a drug is approved and can be granted with or without a patent. They are granted for new chemical entities, orphan drugs (drugs that treat illnesses affecting less than 200,000 people in the United States), post-approval studies, and drugs undergoing pediatric studies shortly after FDA approval for adult use.
Guideline No. 5: Upcoming Catalysts
Lastly, look for pharmaceutical companies with definitive catalysts. Catalysts include study results that will be out shortly (with a date set) and upcoming FDA decision dates. For example, if a company will be releasing study results in the next few months, that wouldn't be a catalyst. However, if it's releasing them in three weeks, with a set date of the June 20, that would be a catalyst.
The first stock on our buy list checks off each item on Tremblay's guidelines. With 48 months of cash on hand, this is a great pharmaceutical stock to buy this year…
Pharmaceutical Stocks to Buy No. 3: GW Pharmaceuticals Plc. (Nasdaq: GWPH)
GW Pharmaceuticals Plc. (Nasdaq ADR: GWPH) is the world leader in developing plant-based cannabinoid therapies. Being in the growth industry of medical marijuana is one of the reasons Money Morning Director of Technology & Venture Capital Research Michael Robinson likes the company.
Unlike most marijuana stocks, GW Pharmaceuticals is listed on a major index (Nasdaq) and is not a penny stock. Right now, GWPH trades just under $100 per share. This helps remove some of the risk of investing in medical marijuana.
Currently, GW Pharmaceuticals is conducting nine clinical trials with four different drugs. Three of those trials are in phase 3. On top of that, one of its products is already on the market in other countries.
Sativex is a drug that is used to control muscle spasms related to multiple sclerosis (MS). The drug is used in almost 30 countries, but not in the United States. Currently, the drug is not up for approval in the U.S. It is, however, pending approval in 12 more countries in the Middle East and Latin America. Currently, revenue from the drug is nearly $6 million.
While Sativex has not been approved by the FDA, its drug Epidiolex is likely to be approved for the treatment of Dravet syndrome (infant epilepsy) shortly. The condition affects one in 15,700 and there are currently few treatment options, according to the Dravet Syndrome Foundation.
If GW Pharmaceuticals gets approval for the drug, it would have two treatments on the market bringing in revenue. In 2016, revenue was $13.32 million. While there are no estimated sales figures for Epidiolex, we can assume revenue will increase once the drug is FDA approved.
Not only is the company on the verge of FDA approval, but it has cash reserves to continue researching and testing its pipeline while it waits. As of Sept. 30, the company had four years' worth of cash on hand. That is four times the amount we like to see.
Since Robinson added GW Pharmaceuticals to his portfolio on March 27, 2014, the stock is up 50%, while the Dow is up 30% over the same time period.
Analysts' one-year price target for GW Pharmaceuticals is $154.00, which is 57% above its current market price of $98.36. And if Epidiolex is approved by the FDA, the stock price is likely to go much higher than $154 per share.
While GW Pharmaceuticals has a strong pipeline, this next company's development strategy all but assures success in the FDA approval process…
Pharmaceutical Stocks to Buy No. 2: Omeros Corp. (Nasdaq: OMER)
Omeros Corp. (Nasdaq: OMER) currently has 10 drugs in development. That is an enormous pipeline. On top of that, a lot of the drugs in Omeros' pipeline are likely to be FDA approved. That's because several of the drugs have already been proven safe and effective.
"[Omeros] leverages FDA-approved generic drugs into proprietary (patentable) formulations," said Tremblay back in 2014. "This takes a lot of the guesswork out of drug development, especially where safety is concerned. If two ingredients have already been approved individually as safe, the only thing you have to prove is that using them together doesn't raise your risk for some unexpected side effect."
Not only does Omeros have a strong pipeline, but it also has its first drug on the market. OMIDRIA was launched in the United States during the second quarter of 2015 for cataract surgery patients. Since then, the company's revenue has skyrocketed.
In 2014, revenue was only $539,000. Last year, revenue was $41.617 million. That's an incredible increase of 7,621% in just two years. Most of that revenue was from product sales. In fact, 99.6% of its revenue came from sales. The other revenue came from grants.
So far this year, Omeros stock is up 55%. The main spike came in March after the company announced the phase 2 clinical trial results of IgA nephropathy cohort in OMS721. The data has been positive for the treatment of kidney disorders. With the results, the company has been able to discuss phase 3 trials with the FDA.
This promising new treatment for kidney disorders is bumping up the company's stock price and will likely continue to do so as long as phase 3 trial data is positive. With the new treatment passing phase 2 trials, the one-year price target for the company is $36.67. That's 138% higher than the current price of $15.38 per share, making it a great investment ahead of phase 3 clinical trials.
Omeros is a great stock to own, especially with the potential of a new drug being FDA approved in the next couple of years.
And this next stock is a must-own for all pharmaceutical investors, according to Tremblay. It just received FDA approval for the treatment of tardive dyskinesia. It is the first drug approved to treat this condition.