Three cheap pharma stocks to buy now

Look for reasonably-valued pharmas to grow your portfolio, says professional stock picker Samuel D Isaly. Here, he tips three such stocks to buy now.

Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Samuel D Isaly, founder and managing partner of Orbimed Advisers LLC.

Large-cap pharmaceutical companies are at a turning point now that the worst of the patent cliff' where patent protection on products expire and hence prices come under downward pressure has passed. Indeed, some of them stand to benefit from new product development and offer valuations that could rise sharply in the near term. We look for reasonably-valued stocks that strive to maintain above average growth profiles and boast strong fundamentals.

We particularly like Roche (TQ: ROG), which posted strong gains last year. We view it as a growth company (it owns biotech products) that trades at a pharma valuation. It has the largest and most impressive group of oncology products in the world, and we expect it to maintain its leadership in cancer drugs through the rest of the decade. The firm may also make advances in cardiovascular and Alzheimer's disease. There is room here for upside surprises.

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New drug developments are the sector's most important catalyst for creating shareholder value, and biotechnology companies are at the forefront, with six of the world's top ten best-selling drugs originally developed by biotech companies.

In the US, Obamacare' the president's healthcare reforms will grant 12 years of market exclusivity for new biotech drugs (ie, it will block competition from cheaper generic products). But for investors, identifying innovative therapies and the next big product cycle are key.

The US regulator, the Food and Drug Administration, has been more accommodating, and has brought in a breakthrough therapy' programme to accelerate development timelines for treatments that are deemed to be important. Last year, for example, it took just three months to approve Kalydeco for cystic fibrosis and Xtandi for prostate cancer.

My next tip is Onyx Pharmaceuticals (Nasdaq: ONXX). The approval of Kyprolis to treat multiple myeloma came as a positive surprise resulting in a share price bounce. Onyx also received approval for Stivarga last year, a drug for refractory metastatic colorectal cancer, developed in partnership with Bayer AG, in which Onyx has a royalty interest. Its flagship product Nexavar continues to grow too. Onyx is also an attractive acquisition target, a factor that is helping to push up the share price.

Our third pick, Gilead Sciences (Nasdaq: GILD), was a top performer last year and its strong product pipeline should continue to deliver returns this year. It purchased Pharmasset, a developer of oral drugs for hepatitis C, in January 2012, and is expected to come to market with a range of pills to cure the disease. Gilead is also a global leader in therapies for HIV and received approval in August for Stribild, a pill that we expect to be a dominant player in the management of HIV.

After a decade of underperformance from 2001 to 2011, the healthcare sector looks poised to make big gains on the back of new products, merger and acquisition activity, growth in emerging markets, and increased demand from ageing populations in the West. For UK-based investors who want to avoid picking single stocks, go for investment trusts such as the Worldwide Healthcare Trust (LSE: WWH) and the Biotech Growth Trust (LSE: BIOG). Their portfolios include small, innovative biotech companies and emerging-market names that are harder to buy than mainstream stocks.

Samuel D Isaly is founder and managing partner of OrbiMed Advisers LLC.