Under the Radar: Two Ways to Profit from Growth in Pharmaceuticals

In volatile times, defensive sectors sometimes fare the best. One of those sectors, pharmaceuticals, has been weak so far this year, as Washington battles out health care reform. But long term, pharmaceutical stocks should do well, especially as consumers get older and demand for pharmaceuticals rise.

Hilary Kramer, editor of GameChangerStocks.com, stopped by our offices to talk about how to profit from the trend. But she didn't focus on big companies such as Pfizer (PFE), Johnson & Johnson (JNJ) and Merck (MRK). Instead, she recommended two "under the radar" companies whose stocks, she says, are well-positioned to move up.

Among the companies Kramer likes: Shire (SHPGY), a Dublin-based bio-pharmaceutical company, which has a market cap of more than $12 billion. Kramer has a strong buy recommendation on it. The most immediate reason: Shire could be a takeover target since mergers and acquisitions are heating up in biotechs.

But even if that doesn't happen anytime soon, Kramer says Shire, which makes well-known medications such as Adderall XR for attention deficit hyperactivity disorder (ADHD), has high hopes for other products including Replagal, a long-term enzyme-replacement therapy for patients with Fabry disease. In fact, the company has eight drugs in Phase II trials, which gives it breathing room in case any fail to perform as expected. Shire, she says, is also immune from pricing pressure in Europe because it makes lifesaving orphan drugs.

Another company Kramer says has great potential is Medco Health Solutions (MHS). Based in Franklin Lakes, N,J., Medco is a pharmacy benefit manager, and it operates the nation's largest mail-order pharmacy. As baby boomers continue to age, Kramer says more people with chronic medical conditions will require medication -- and many of them will likely opt for mail order. Medco already has 65 million customers and generated $60 billion in 2009 net revenues.

The stock is down because second-quarter results disappointed, and investors are concerned about competition from other pharmacy benefit managers such as CVS Caremark (CVS). That's an opportunity to get in, says Kramer. She also points out that Medco is well-positioned to increase earnings given a large number of blockbuster drugs going off patent over the next 12 months.