These Healthcare Stocks Are Fit for Retirement Portfolios

The following healthcare stocks are particularly attractive to hold in a retirement portfolio. These names boast strong fundamentals, innovative treatments, a robust pipeline, dependable dividends and can withstand economic shocks better than other segments of the economy.

Healthcare heavyweight Gilead Sciences (GILD) develops and markets therapies to treat life-threatening infectious diseases. The core of its portfolio is focused on HIV and hepatitis B and C. The company has made some strategic acquisitions in recent times to broaden and bulk up its pulmonary and cardiovascular diseases and cancer treatments, as well as exposure to cell therapy and noncell therapy in oncology.

Gilead Sciences generates enviable profit margins with its HIV and HCV portfolio, which requires only a small salesforce and inexpensive manufacturing. Its “portfolio and pipeline support a wide moat, but Gilead needs HCV market stabilization, strong continued innovation in HIV, solid pipeline data, and smart future acquisitions to return to growth,” says a Morningstar equity report.

Gilead has been pushing to create a pipeline outside of HIV and HCV. Of particular interest are Gilead’s “2020 acquisitions of Forty Seven (CD47 antibody magrolimab) and Immunomedics (breast cancer drug trodelvy) adding to the oncology pipeline,” says Morningstar sector strategist, Karen Andersen, who appraises the stock to be worth US$81.

Gilead's Veklury is also a leading treatment for COVID-19. The therapy generated a staggering US$5.6 billion in sales in 2021, although sales are poised to decline in 2022, says Andersen.

The biotech major’s wide economic moat, or sustainable competitive advantage, stems from patent protection on newer HIV regimens and Gilead's continued dominance in the hepatitis C market. This will ensure strong returns for the next couple of decades, says Andersen. “Gilead's expertise in infectious diseases and single-pill formulations is a part of its research and development strategy, which we see as one of the strongest intangible assets supporting the firm's wide moat,” she adds.

U.S. pharma behemoth, Merck (MRK) makes pharmaceutical products to treat several conditions including cardiometabolic disease, cancer, and infections. The firm's cancer drugs generate the bulk of sales, but Merk also has a formidable presence in the vaccine business, with treatments to prevent hepatitis B and pediatric diseases, as well as HPV and shingles. Nearly half of the firm's sales are generated in the U.S.

Merck's strong lineup of high-margin drugs and a pipeline of new drugs should ensure strong returns on invested capital over the long term. As well, following the divestment of the Organon business in June 2021, “the remaining portfolio at Merck holds a higher percentage of drugs with strong patent protection,” says a Morningstar equity report.

Moreover, after several years of only moderate research and development productivity, Merck's drug development strategy is yielding important new drugs, forming a solid pipeline.

The healthcare firm’s new products have helped offset the impact of the generic competition due to recent major patent losses. In particular, Keytruda for cancer represents a key blockbuster with multi-billion-dollar potential. “It holds a first-mover advantage in one of the largest cancer indications of non-small cell lung cancer,” says Morningstar sector director, Damien Conover, who appraises the stock to be worth US$94.

Merck reported strong fourth-quarter results, supported by sales of COVID-19 treatment molnupiravir. Conover says while the rate of COVID infections should decline with increased vaccine utilization, “the core underlying business for Merck remains solid and underappreciated.”

The stock is currently undervalued, “with the market not fully recognizing the firm's growth potential,” he adds. 

British pharma major, GlaxoSmithKline (GSK) is one of the largest firms by total sales. It makes drugs for treatments across several therapeutic classes including respiratory, cancer, and antiviral, as well as vaccines and consumer healthcare products. Glaxo is also plugged into markets like HIV and consumer products through joint ventures.

GlaxoSmithKline has exploited its vast resources to develop the next generation of healthcare treatments. “The company's innovative new product lineup and expansive list of patent-protected drugs create a wide economic moat,” says a Morningstar equity report.

The scale of Glaxo's reach is reflected by its rich product portfolio that spans several therapeutic classes as well as vaccines and consumer goods. “The diverse platform insulates the company from problems with any single product,” says Conover, who recently upped the stock’s fair value from US$48 to US$53, prompted by new royalties from Gilead's HIV drug Biktarvy and a slightly improved outlook for operating margins and the long-acting HIV drugs.

The company has developed next-generation drugs in respiratory and HIV areas that should help mitigate both branded and generic competition over the next decade, adds Conover.

On the pipeline front, Glaxo has pivoted from targeting slight enhancements toward true innovation. It is also focusing more on oncology and the immune system, with genetic data to help develop the next generation of drugs. “We expect this focus will improve approval rates and pricing power,” says Conover, stressing that “in contrast to respiratory drugs, treatments for cancer indications carry much strong pricing power with payers.”