Big pharma has some great long-term drivers, ranging from aging demographics to a growing middle-class around the world.

Few products reach a level of importance as high as the drugs that keep us alive and healthy. It’s especially true as we get older, and that’s something happening to a record number of people these days.

#-ad_banner-#Yet one more benefit of drug stocks is the counter-cyclical nature of sales. While people may skimp on everything from cars to tech when the economy turns sour, they aren’t going to stop taking their prescriptions. 

In fact, my favorite pharma stock booked annualized growth in sales of 11% over the three years through 2009.

With a global economic outlook that’s looking pretty weak, that revenue resilience is a huge plus for investors.

Looking at the industry, one company stood out for its pipeline of upcoming drugs and the potential for higher profits over the next few years.

A Blockbuster Pipeline And Higher Profits Make This Leader My Top Pick
Big pharma is all about the pipeline, and my top pick is no different. The company had a solid reputation for its R&D until a steep patent cliff in 2014 had investors worried.

In fact, after averaging annual revenue growth over 9% in the five years through 2011, sales started to slide on competition from generics. Sales were down 15% in 2014 to $19.6 billion, but have since started to recover.

Now, Eli Lilly (NYSE: LLY) has refilled its pipeline and has several potential blockbusters on the way. 

The company’s approval last year for its combo drug Glyxambi makes it the producer of the first and only diabetes treatment to combine dual mechanisms to help patients improve glycemic control. That could be a game-changer for the Type 2 Diabetes market, expected to reach $157 billion next year. 

Lilly announced August 22nd that it had received fast-track status by the U.S. Food & Drug Administration along with partner AstraZeneca for its AZD3293 BACE inhibitor, currently in phase three trials. The partnership announced the planned start of another phase three trial in the third quarter for the drug, which targeted for people with mild Alzheimer’s dementia. Alzheimer’s is the most common form of dementia, accounting for up to 80% of cases, with worldwide costs estimated to reach $1 trillion by 2018.

Opioids are currently the most common solution for moderate to severe pain, and totaled more than $9 billion in sales last year. Opioids carry considerable risks though, including a high potential for addiction and abuse. Anti-NGF compounds could be the solution, but they came under scrutiny in 2010 and 2012 for health concerns. 

An FDA hold on clinical trials, lifted mid-2015, caused many of the researching companies to cancel their program on the compounds. 

Not Eli Lilly though, which is now one of only two companies in late-stage development. Lilly released test data in May on its phase three anti-NGF product, reporting no safety warnings from trials.

Lilly may also be looking at considerable upside on its IL-17 class of immunology drugs, addressing a $60 billion market for diseases like rheumatoid arthritis and psoriasis. An older TNF class of drugs including blockbusters Humira and Remicade will be losing patent protection as soon as December, causing revenue nightmares for manufacturers. The IL-17 class shows better efficacy and could be ready to replace TNF drugs over the next several years. Lilly has been cleared in the United States and Europe for its IL-17 psoriasis drug Taltz, which could prove to be a blockbuster. Better still, the company does not have a TNF class drug losing protection to weigh on sales.

The company’s success in reloading its pipeline has helped it now refocus on cost control and profitability. Management is targeting a reduction in R&D costs and marketing through 2018 that could help reduce operating costs to 50% of sales, down from 59% in fiscal 2015.

That reduction in R&D won’t help the company over the very long-term but it’s great news for investors over the next few years. 

The company generated $2.3 billion in free cash flow over the last four quarters and has bought back an average $775 million in shares during the last two years. The potential for higher sales and lower costs mean stronger fundamentals and even more cash that can be shared with investors. 

Shares could return to the 52-week high of $92.85 before too long for a 18% gain on top of the 2.6% yield. Over the next couple of years, profitability and several opportunities for blockbuster drugs could take the shares past $100 each.

Risks To Consider: Drug manufacturers can be volatile around release of data on clinical trials. Poor results on any of the company’s trials could weaken shares temporarily, but shouldn’t derail the upside theme.

Action To Take: Take a position in shares of Eli Lilly on the potential for a sales boost from a blockbuster pipeline just as costs are coming down.

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