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4 Top Drug Stocks That Can Be Purchased on the Cheap This Fall

Drug Pill On Top Of Money Cash Biotech Pharma Getty
Drug Pill On Top Of Money Cash Biotech Pharma Getty

Some great drug stocks could be hiding in plain view. Image source: Getty Images.

U.S. stocks have been taken for a wild ride in 2016, but at least most long-term investors can relish the fact that despite the volatility, the broader market indexes are all higher year-to-date. The same can't be said for the SPDR S&P Biotech ETF or VanEck Vectors Pharmaceutical ETF , which are down 15% and 16% year to date, respectively.

These top drug stocks are cheap and possibly worth buying

Drug stocks sold off hard to begin the year as investors sought the security of less risky, profitable investments. Remember, most drug developers aren't profitable on a recurring basis, meaning valuations can be prone to wild swings based on emotions and clinical data. While this move lower in drug stocks has left some investors in the sector disappointed, it's also created quite the opportunity to pick up top drug stocks on the cheap this fall. Here are four cheap drug stocks worth considering for your portfolio.

Teva Pharmaceutical Industries Ltd.

Israeli-based Teva Pharmaceutical (NYSE: TEVA) isn't exactly a household name, but with its shares down 35% year-to-date, perhaps it should be for investors.

Teva's business has traditionally been split into two components: branded therapeutics and generic drugs. The biggest concern for Teva has been that its biggest branded therapeutic, Copaxone, a long-standing injectable treatment for multiple sclerosis, lost patent protection and is facing exposure to generic competition. With Copaxone at one time accounting for more than 20% of Teva's sales, the fear had been that Teva's growth could stall for years to come.

Scientist Biotech Lab Worker Writing Getty

Image source: Getty Images.

The good news for Gilead and its shareholders is that hepatitis C should remain a strong cash cow for many years to come. Though competition in HCV does exist, Gilead is likely to retain most HCV market share for a variety of reasons. For example, there's nothing that's more convenient or effective than Harvoni or it's recently introduced pan-genotypic oral HCV pill, Epclusa. There's always a possibility that another drugmaker could develop a treatment that's effective at removing the hepatitis C virus at four or six weeks, but any such therapy is likely many years out at best. Gilead's rapport with physicians in HCV and the effectiveness of its HCV drugs should result in substantial cash flow generation year in and year out.

Gilead could also benefit from using its cash flow to make acquisitions. In Nov. 2011, Gilead acquired little-known Pharmasset for $11 billion, giving it access to what would eventually set the foundation to its blockbuster HCV franchise. Gilead could look to bolster its dominant antiviral portfolio and angle for a hepatitis B or nonalcoholic steatohepatitis cure, or it may opt to join the fast-growing cancer drug space.

Like Teva, Gilead is paying out an above-average yield of 2.6%, and it's trading at a minuscule six times next year's estimated full-year EPS. It just about doesn't get cheaper than that.

Bristol-Myers Squibb Co.

Another big drug stock to take it on the chin recently is Bristol-Myers Squibb (NYSE: BMY) . Shares of Bristol-Myers are down 28% year-to-date and 35% over the past three months. The reason? Look no further than its recent CheckMate-026 results.

In August, Bristol-Myers Squibb announced that its blockbuster cancer immunotherapy Opdivo had failed to reach its primary endpoint of a statistically significant improvement in progression-free survival (PFS) for first-line non-small cell lung cancer (NSCLC) patients whose tumors had PD-L1 expression of 5% or greater.

A couple weeks ago we got the specifics of the CheckMate-026 trial, with the chemotherapy placebo actually demonstrating modest favorability in PFS and Opdivo having a slight edge in overall survival. Compounding Bristol-Myers' woes, competing cancer immunotherapy Keytruda, developed by Merck , met its mark with flying colors in first-line NSCLC in patients whose tumors had at least 50% PD-L1 expression. Losing out on first-line NSCLC could cost Opdivo a few billion dollars in peak sales, and Wall Street is none too pleased.

Lab Research Dropping Liquid Into Test Tube Getty

Image source: Getty Images.

However, Celgene is far more than just Abraxane. The company's lead therapy is multiple myeloma blockbuster Revlimid, which looks to be on pace for $10 billion in annual sales by the end of the decade, if not more. Revlimid has benefited from an increased number of multiple myeloma diagnoses, consistent or growing market share, improved pricing power, and the potential for more than a half-dozen label expansion opportunities still to come.

Celgene could also reap significant rewards from its M&A and collaboration strategies. Celgene acquired Receptos for $7.2 billion last year in order to gain hold of ozanimod, an experimental oral drug with a lot of promise to treat multiple sclerosis and ulcerative colitis. Celgene's management team believes ozanimod could have the potential to eclipse $4 billion in annual peak sales.

In terms of collaborations, Celgene has more than 30 licensing partners that could translate into it getting a piece of the pie in numerous first-in-class oncology or anti-inflammatory therapies. Relying heavily on collaborations also means that Celgene is spending its money on only the most promising drug candidates.

A sub-one PEG ratio makes Celgene a drug stock to closely monitor.

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Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.

The Motley Fool owns shares of and recommends Celgene and Gilead Sciences. It also recommends Teva Pharmaceutical Industries, and has the following options: short October 2016 $95 puts on Celgene and short October 2016 $85 calls on Gilead Sciences. Try any of our Foolish newsletter services free for 30 days . We Fools may not 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 .

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

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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