After a strong year of relative performance for pharmaceutical stocks in 2012, the analysts at Jefferies Group Inc. (NYSE: JEF) predict that 2013 could show more of the same. However they are careful to point out that the odds that the sector will outperform the overall market have diminished. With that caveat aside, they are focusing on the high-quality companies with good visibility on top line growth and the potential to increase earnings via strong late-stage pipelines.
Two main issues will impact large pharmaceutical companies this year. One is patent expiration, which most companies face every year. Losing prized, money-making products to generics is always a key issue. In addition, the Affordable Health Care Act, known on Main Street as Obamacare, is scheduled to start on January 1, 2014. This event has many companies looking at reimbursement guidance from insurance companies for their products going forward. Those issues aside here are the top five Jefferies’ global pharmaceutical picks for 2013.
The top global pick, which was initiated at a Buy today, is AbbVie Inc. (NYSE: ABBV). Known for their HUMIRA product used for the treatment of rheumatoid arthritis, AbbVIE is trading today at $35.54. The price target is $44. The consensus price target is lower at $37.50.
The number two pick, which is also the top European pick, is Novartis A.G. (NYSE: NVS). This company, which includes eye care division Alcon and prescription medicine division Sandoz, is trading today at $65.18. The target price is $81.50, when adjusted for U.S. dollars. This is significantly higher than Wall St. estimate of $65.50.
Next on the list is Sanofi (NYSE: SNY). This Paris-based company researches, develops, manufactures and markets health care products worldwide. Its principal pharmaceuticals include Lantus and Apidra. It is trading today at $47.99, the Jefferies target when adjusted to U.S. dollars is $54.90. The street consensus is at $52.30
At number four is Swiss giant Roche Holding. Roche discovers, develops and provides diagnostic products and services that enable patients and health care professionals in the detection, prevention, diagnosis and treatment of diseases. It is trading near $53.12, and the target price is $61.40 when adjusted for U.S. dollars. The street consensus is $55.83.
Rounding out the top five is American drug giant Pfizer Inc. (NYSE: PFE). Pfizer primarily offers such well-known products as Celebrex, Chantix/Champix, Lipitor, Lyrica, Premarin, Pristiq and Viagra pharmaceutical products in the therapeutic and disease areas of Alzheimer’s, cardiovascular, erectile dysfunction, genitourinary, depressive disorder, pain, respiratory and smoking cessation. Shares are trading at $26.61 and the Jefferies target price is $31. The consensus among other firms is $29. Pfizer also pays a healthy 3.60% dividend, which could make it an outstanding total return investment.
Large cap pharmaceutical stocks have long been a staple of a well-rounded portfolio. Like Pfizer, many offer dividends that are superior to what is available in the Treasury or corporate bond market. Typically they do well in a bull market, but because of their more defensive nature they tend to hold up much better than many sectors when the market sells off.