Josh Nathan-Kazis
Dec. 18, 2019 11:34 am ET
There’s a theme developing in the 2020 outlooks Wall Street
analysts covering big pharma are putting out this week: next year is looking
good for the sector.
In a
note out Wednesday morning, Morgan Stanley’s David Risinger
upgraded his view on the industry to Attractive from In-Line.
“We
expect novel disease treatments, combined with limited patent expiration
exposure, to yield healthy growth in the coming years,” Risinger wrote. He also
said that pricing in the U.S. would be “healthy” in 2020.
Still,
while Risinger doesn’t believe it’s likely that U.S. politicians will succeed
in regulating drug pricing in the near term, that may not last. “The
sustainability of high U.S. drug pricing remains a concern, and we cannot rule
out risks,” Risinger wrote.
Risinger’s
take echoes a note published last Thursday by
J.P. Morgan analyst Chris Schott, who argued that big pharma
had “potential for a recovery year in 2020.”
The
back story. After a weak year, big pharma stocks have been outperforming
this quarter. The S&P 500 Pharmaceuticals industry
index is up 10.7% this quarter, while the broader S&P 500 is up just 7.3%.
Still, the gains haven’t compensated for a slow year. The pharmaceuticals index
is up 10.5% in 2019, while the S&P 500 is up 27.4%.
What’s
new. In his note on Wednesday, Risinger wrote that the pipelines of
major pharma players look strong.
“We
anticipate high rates of drug approvals in coming years because new drug
applications have stepped up by over 60% over the past few years,” he wrote.
Yet he
warned that pricing remained a worry, even as legislators have so far failed to
take action. Risinger flagged the possibility that certain Democratic
candidates winning the presidential nomination could be seen as a negative, or
that the current administration could push forward with the international price
index, an initiative to peg Medicare Part B drug prices to the prices paid
overseas.
He also
said that a major win by Democrats that hands them both the Senate and the
House would be seen as a negative for big pharma.
“Democratic
control could cause the market to discount higher risk that the government
someday negotiates directly on drug prices,” Risinger wrote.
Risinger
also upgraded Eli Lilly (ticker: LLY) to
Overweight from Equal-weight, writing that the stock has significant
earnings-growth potential.
Looking
forward. Risinger wrote that the “next big thing” could be early-stage
immuno-oncology treatments, estimating a total of $16 billion in sales
potential in the U.S. alone. So-called adjuvant and neo-adjuvant therapies
treat earlier-stage cancers; Risinger wrote that the biggest opportunities are
in non-small cell lung cancer, breast cancer, and head and neck cancer.
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