2 Top Pharma Stocks to Buy in a Recession

It's no secret that pharma investors are eager to prepare for the recession that's likely coming, spurred by the global economic shutdowns to contain the coronavirus pandemic. While many pharmaceutical stocks will suffer fiercely from a broadly contracting economy, there are a couple of companies that performed favorably in the last recession when compared to the market at large -- and they may do so again.

Unlike pharma companies devoted to producing new drug products or therapies, the organizations that flourished during the Great Recession were those that sold the essential goods and raw materials that other pharmas and healthcare companies needed to stay in business.

A group of people confer with a doctor at a table.

Image source: Getty Images.

Becton Dickinson

Massive laboratory and clinical goods companies like Becton Dickinson (NYSE: BDX) are often excellent anchors for healthcare portfolios during recessions, thanks to their diversified product mix and deep integration into the value chains of both smaller and similarly sized companies. Critically, Beckton Dickinson beat the market during the last recession, initially losing less value, then much later, growing more rapidly during the years of slow recovery.

SPY Chart

SPY data by YCharts

Today, Beckton Dickinson's profit margin is slim at 6.2%, but its year-over-year quarterly earnings growth of 815% can fall a long way and still be impressive. Likewise, the company's trailing annual dividend yield of 1.21% is lower than the S&P 500 average of 2%, but investors should also be aware that Beckton Dickinson is a Dividend Aristocrat, indicating that its dividend has increased without fail for the last 25 years, even during past recessions. Thus, if a forthcoming deep recession starts to affect BD's bottom line, the company will have plenty of leeway to adapt while still delivering for its shareholders. 

That's assuming it has to adapt at all, however. According to its second-quarter earnings report, the economic conditions of the pandemic have largely increased demand for Beckton Dickinson's products so far, with its Life Sciences division reporting an increase of 7.1% in revenues compared with the prior year and other divisions reporting more modest increases. While it's uncertain whether this performance will continue as the economic ramifications of the pandemic wear on, it's a positive sign that the company is weathering a difficult storm without major disruption.

SPY Chart

SPY data by YCharts

ThermoFisher Scientific

Like Becton Dickinson, ThermoFisher Scientific (NYSE: TMO) performed well during the first half of the last recession, gaining in value while the market fell. While a catastrophic drop would eventually put ThermoFisher at parity with the rest of the market in the middle of the recession, by the time it concluded, Thermo had returned to consistent growth. 

To accomplish this feat, Thermo simply continued with business as usual -- making products that are in high demand in nearly every segment of the pharma and biotech industries, as well as in hospitals and other healthcare markets. As of 2019, 51% of Thermo's $25.6 billion in revenues was derived from sales of its consumable products for clinics and laboratories, which it classifies as strongly recurring revenue. Given that in recent years Thermo has expanded its pharma services business to make it a larger part of its revenue, when the company entered the Great Recession, this proportion was likely even higher.

While its sub-1% dividend is nothing to write home about, Thermo's profit margin is a healthy 14%, and it has nearly $3 billion in cash. When paired with its trailing 12-month levered free cash flow of $3.2 billion, that balance leaves Thermo unlikely to encounter any liquidity issues even if demand for its core clinical and laboratory products suffers in the short term.

TMO Profit Margin Chart

TMO Profit Margin data by YCharts

The ThermoFisher of today is even more hardy than it was during the last recession. Trailing 12-month revenues have increased nearly 200% since mid-2007, profit margins are up substantially, and the company's selection of product offerings has only grown in size.

For investors who are still skeptical of Thermo's merit as a recession stock, review the company's better-than-expected Q1 earnings report, and be sure to check out the Q2 earnings report on July 22. Thermo's revenues may well look as favorable as Becton Dickinson's, with key product segments posting growth as a result of increased research activity and hospital utilization. If this is the case, it's a strong sign for investors that the company is primed for another successful rally and recovery in the event of a pandemic-induced recession.

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Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool recommends Becton, Dickinson. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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