Several factors are combining to create a positive outlook for the “Big Pharma” sector. In developed nations, the number of people 65 and over is already at record levels and is set to grow as the baby boomers enter their retirement years; as a group, this demographic represents the highest users of medications.

In addition, the steady increase in new drugs and therapies that require pharmaceutical products helps boost profits because margins are higher on newly patented drugs.

Partly, as a result, there’s an industry focus on developing drugs for diseases that affect large populations as that’s where the sales potential is greatest, says Nitin Kumbhani, vice chairman and chief of growth equity strategies with Montreal-based Fiera Capital Corp.’s U.S. division in Dayton, Ohio.

It’s not all good news for profits in this sector. Governments everywhere are trying to contain health costs, which can include efforts to keep drug prices down. U.S. President Donald Trump targeted pharmaceutical companies in his press conference in mid-January, raising the possibility of allowing competitive bids for drugs provided through the massive U.S. Medicare program. He also castigated U.S. companies for producing drugs overseas.

Mindy Perry, portfolio manager at Manulife Asset Management (US) LLC in Boston, isn’t concerned about Trump’s views on overseas production; she says it wouldn’t have a big impact on U.S. firms’ revenue. However, Perry does believe that allowing companies to bid to supply drugs for Medicare could be an issue. (Currently, Medicare is not allowed to negotiate drug prices directly with drug manufacturers.) However, Perry doesn’t see the U.S. Congress going along with Trump on this measure: “Republicans have tended to be supportive of the drug industry.”

Charles Burbeck, managing director for global equities at UBS Global Asset Management (UK) Ltd. in London, also doesn’t see much impact on this sector from Trump. But he does note that there are increasing numbers of cases in which drug companies have been fined aggressively for what’s considered unreasonably high prices.

Perry looks for companies that “are truly innovative and are finding solutions to health issues.” Burbeck agrees: “If you have differentiated products for unmet health needs, there’s fantastic pricing power.”

Two of Perry’s current stock picks are Biogen Inc. in Boston and Merck & Co. Inc. in Kenilworth, N.J.

Burbeck, who doesn’t have detailed knowledge of the science behind the products, likes to invest in companies that have several products in the pipeline or in a portfolio of smaller firms. This strategy takes account of the possibility that, if some products aren’t successful, others are likely to be.

Among Burbeck’s picks are Indianapolis-based Eli Lily & Co., Roche Holding AG in Basel, Switzerland, Fresenius SE & Co. KgaA in Homberg, Germany and Johnson & Johnson Inc. in New Brunswick, New Jersey.

Here’s a brief look at these companies:

Biogen Inc. focuses on neurology, particularly drugs for multiple sclerosis (MS). But what interests Perry particularly is a drug for Alzheimer’s disease now in its pipeline.

“There’s currently no good drug for Alzheimer’s and Biogen is in the forefront of developing one,” she says. The firm is doing human trials but the drug remains two to three years from the market. Perry says the management team is good and the stock is reasonably priced. Kumbhani also mentions Biogen, saying the Alzheimer’s drug shows “some promise.”

A recent report from Credit Suisse Securities (USA) LLC in New York is more cautious, rating the stock “neutral” because of “2017 base business headwinds in MS from newer high efficacy products.”

Eli Lilly & Co. is a conglomerate, with both pharmaceutical and biotech arms. The firm acquires small biotechs and often buys them out when their research reaches a late stage, says Burbeck. Eli Lilly has had a lot of success in the cancer and heart disease areas and is currently also working on Alzheimer’s. Burbeck says UBS doesn’t expect Eli Lilly to come up with an effective drug to slow or reverse Alzheimer’s, because all other attempts have failed. However, he notes that it’s possible. In any event, the company is currently “cheap,” even leaving aside the potential for its Alzheimer’s medication, he says.

A recent Credit Suisse report has an “outperform” rating on the stock, based on “meaningful margin expansion in the coming years.”

Roche Holding Ag. Burbeck considers this company a more defensive holding because its main subsidiary, F. Hoffman-LaRoche AG, has an established pipeline of drugs being developed and is not dependent on one or two possibilities. He says the firm has a portfolio of “good” patents and its well established oncology drugs are still growing. He considers the company’s “knowledge base and its very good franchise to be undervalued.”

Fresenius Se & Co. Kgaa. A large part of this company’s business is in dialysis, an area in which there’s a lot of ongoing business because patients are on dialysis for long periods. There are also high barriers to entry, given the cost of dialysis equipment. Burbeck thinks this part of the firm’s business is undervalued in the stock price. He notes that they also have a big hospital business in Germany. The firm has also recently acquired a chain of hospitals in Spain, where it expects to cut costs by replicating its very efficient operating model.

Johnson & Johnson Inc. is also a “quite defensive” stock, says Burbeck. It’s very diversified, selling a wide range of consumer staples products, including cosmetics and anti-aging products, as well as drugs. He notes that cosmetics and anti-aging products are big growth areas, not just in the industrialized world but also in emerging markets. Burbeck considers the stock undervalued, pointing out that the company has a very good return on equity and good revenue growth.

Merck & Co. Inc. also is working on a potential Alzheimer’s drug. Perry says it could be more potent than Biogen’s. However, it would not compete with Biogen’s as Merck’s is intended to be used in combination with other drugs.

The firm also has a very innovative drug for cancer, which uses a patient’s immune system to attack the cancer cells. This medication is already on the market and Merck is trying to encourage more use. Perry considers the stock reasonably priced.

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