Few industries have been hit as hard as pharmaceuticals over the past year. From public outrage over price increases to the potential for government oversight into profits, the group hasn’t enjoyed the double-digit gains seen across the rest of the market.

Drugmakers and investors thought they dodged a bullet in the presidential election, but the new administration has been just as vocal about drug prices as the last.

In this darkest hour, there may be some light shining through to the rest of the year.

A new leader at the Food and Drug Administration (FDA) could end the industry’s drought of approvals. The fundamental shift to an older society continues to support higher sales and Washington has yet to put together a plan that would threaten pricing.

I’ve been following the best-of-breed companies in the space, waiting for a potential turnaround in investor sentiment. That turnaround may be coming — and it could happen just as two leaders boost sales with new blockbuster drugs.

Pharma Is Ready To Bounce Back
Pharmaceutical companies have been rocked over the past year on regulatory oversight and patient anger over drug pricing. The PowerShares Dynamic Pharmaceuticals ETF (NYSE: PJP) is up just 2.8% over the last year against the 17.5% surge in the S&P 500.

#-ad_banner-#Despite near-term uncertainty, the industry faces favorable tailwinds on demographics and demand for drugs. The Administration for Community Living (ACL) reports that seniors age 65 and older made up just 13% of the U.S. population in 2010 but are expected to account for 16% of the population, nearly 55 million Americans, by 2020.

The Bureau of Labor Statistics (BLS) reports in its consumer expenditures survey that seniors spend more than double the amount on pharmaceuticals as younger cohorts. Seniors spend an average of $672 annually for drugs compared to $312 annually in all other households.

Part of the weakness last year in pharma was due to a drop-off in drug approvals. The industry saw just 22 new molecular entities approved by the FDA last year, the least approved since 2010. The FDA rejected or delayed more applications in 2016 than during the prior two years.

The industry may see faster drug approvals coming if President Trump’s pick for FDA commissioner, Scott Gottlieb, is confirmed. Gottlieb, a physician and Deputy Commissioner for the FDA under George W. Bush, has advocated for relaxing the standards for ‘breakthrough’ designation that allow for faster approvals and has authored papers arguing for accelerated approval of drugs based on early evidence during clinical trials.

Two Companies With Blockbuster Pipelines
The faster approval process could mean an opportunity for two companies with strong pipelines of late-stage drugs. Both companies are relatively inexpensive due to weak investor sentiment for the overall group but could see share prices climb on stronger sales and an increased investor appetite for the industry.

Roche Holding (OTC: RHHBY) has more than 18,000 employees working in research and development, more than many pharma companies count in total staff. The company was granted five FDA breakthrough therapy designations last year and has recently boosted its oncology line with the launch of several new drugs.

Tecentriq, a cancer immunotherapy treatment, recently became the first drug for advanced bladder cancer patients to gain U.S. marketing clearance in more than 30 years. A final FDA decision on the drug’s marketing approval is expected in April.

The company’s multiple sclerosis drug Ocrevus could be one of the biggest launches of 2017, with global sales expected to exceed $4 billion by 2022. A Prescription Drug User Fee Act (PDUFA) approval review for the drug is expected later this month.

Strength in the outlook has helped the shares eke out a 4.7% gain over the last year, but they still only trade at 17.2 times trailing earnings versus an industry average of 27.1 times earnings. Earnings are expected 3.8% higher over the next year to $1.91 per share and could drive the shares up 19% to my $38 target.

Novartis AG (NYSE: NVS) reported more than 200 projects in clinical development at the end of 2016 with 14 late-stage projects expected to file for regulatory approval this year. The FDA has granted priority review for Ribociclib as a first-line treatment for post-menopausal women with advanced breast cancer and the European Medicines Agency (EMA) has accepted the company’s application for review of the drug. Phase III trials of the treatment demonstrated a significant increase in survival for various patient subgroups.

Novartis has also boosted its pipeline recently with partnership agreements and acquisitions, signing agreements with Ionis Pharmaceuticals and Conatus Pharmaceuticals and acquiring Encore Vision and Ziarco since December of last year.

Shares are higher by 4.0% over the last year and trade for just 16 times earnings. Earnings are expected flat over the next four quarters but could surprise higher on the company’s pipeline potential. My target of $90 per share is based on earnings growth to $4.86 per share and an 18.5 times price multiple.

Risks To Consider: Even the best pharmaceutical companies will see shares hit on new headlines about drug pricing but the strongest will survive and thrive over the long-term.

Action To Take: Take advantage of recent headlines and inexpensive valuations to position in the best-of-breed pharma names.

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