Big Pharma’s Coming Back in 2020. Don’t Hold Your Breath for Generic Drug Stocks

By Josh Nathan-Kazis Dec. 12, 2019 9:04 am ET

The stocks of big pharmaceutical companies have trailed behind the market in 2019, despite a rally late in the year. But things are looking up.

In a note published Thursday, J.P. Morgan analyst Chris Schott argued that the so-called Big Pharma stocks are set for a comeback in 2020.

“For Major Pharma, we remain constructive on the group and see the potential for a recovery year in 2020 after the sector underperformed the broader market in 2019,” Schott wrote.o Attract Consumers

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Schott argued that a new cycle of drug launches will boost the group, and that talk of overhauls to how drug prices are set is unlikely to lead to legislation.

His outlook for the generic drugmakers was far less rosy. That sector, known as specialty pharma, has been beaten down for years, amid litigation risk, pricing struggles, and issues with debt.

“Coupling these dynamics with still elevated leverage, we do not see a compelling reason to broadly own the group,” Schott wrote of the specialty pharma names.

The back story. The share prices of the Big Pharma giants have recovered somewhat in recent months relative to the market, but not enough. The S&P 500 Pharmaceuticals industry index is up 8.2% this year, while the broader S&P 500 is up 25.3%. The S&P 500 Health Care sector index, which includes 60 diverse health-care companies, is up 15.3%. Some of the underperformance of the Big Pharma group, which includes nine names, is due to Pfizer (ticker: PFE), which is down 12.4% this year.

What’s new. In his note on Thursday, Schott argues that the concerns over drug-price overhaulslikely won’t have a fundamental impact on Big Pharma in 2020.

“While pricing reform controversies are likely to persist in 2020, there appears to be more headline risk than fundamental risk,” Schott wrote. “We continue to expect more bark than bite in 2020 as we have seen very little legislative progress in 2019 that suggests significant price reform is likely with a split Congress and a limited ability for the administration to implement significant reform.”

He said that the biggest sources of growth for the sector are the so-called PD-1 inhibitors, a category of cancer medications such as Merck’s (MRK) Keytruda and Bristol-Myers Squibb’s (BMY) Opdivo. “We are forecasting ~$50bn peak sales opportunity for the market,” Schott wrote.

Looking ahead. Schott also wrote that he expects smaller-scale mergers in 2020, rather than giant deals like the tie-up between Bristol-Myers Squibb and Celgene that was announced in January. “We see biz dev pivoting towards bolt-on deals in 2020 with focus on building out existing therapeutic verticals and adding potential mid-2020s launch opportunities,” Schott wrote.

As for specialty pharma—a category largely made up of generic drug makers—Schott remains wary. He wrote that the companies face pressure both from competition and from struggles over pricing. He also highlighted the ongoing opioid litigation, saying he sees a “long way to go for a master settlement.” And he noted that the companies remain highly levered.

“Along these lines, valuation does not seem attractive despite significant underperformance over the past 2-3 years,” Schott wrote.

Schott said that his top picks in major pharma in 2020 are Eli Lilly (LLY), Merck, and Bristol-Myers.

https://www.barrons.com/articles/these-are-the-20-best-performing-stocks-of-the-past-decade-and-some-of-them-will-surprise-you-2019-12-09