Why Credit Suisse Prefers Johnson & Johnson Over Pfizer

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Major pharmaceutical companies have posted a relatively positive year so far. Currently, Johnson & Johnson (NYSE: JNJ) is leading the pack with Eli Lilly and Co. (NYSE: LLY) a close second. However, one key analyst weighed in on the industry recently and is seeing a couple of companies dropping lower in the group.

Essentially, Credit Suisse is maintaining its view of Johnson & Johnson and Eli Lilly at the top, while taking a sideline position on the likes of Pfizer Inc. (NYSE: PFE) and Bristol-Myers Squibb Co. (NYSE: BMY).

The brokerage firm has an Outperform rating for Johnson & Johnson with a $148 price target. In its report the Credit Suisse said:

We reinstate coverage of Johnson & Johnson after the close of the Actelion acquisition. The stock has appreciated 20% since the deal was announced on Jan 26 (vs. the S&P 500 +7.5%) but we see room for further upside, driven by key pharma growth drivers. Based on channel checks and detailed modeling we have done across various therapeutic areas, we see opportunities for significant upside from assets such as Xarelto, Darzalex and Imbruvica. Our $148 target price, which is a 75%/25% blend of DCF ($149) and P/E ($144) valuation, suggests 10% additional upside from the latest closing price. The main risks to our Outperform rating and $148 target price are unexpected challenges to the pharma business products, both marketed and in development… Actelion acquisition adds another area of focus, but at a steep price. Based on our estimates, the $29.1Bn that Johnson & Johnson paid for Actelion is slightly above what we think the company was worth, although it does bring Johnson & Johnson another area of growth and the potential for further upside through the equity stake in the R&D spin-out Idorsia.

As for Pfizer, Credit Suisse downgraded the stock to a Neutral rating from Outperform and lowered its price target to $36 from $38. According to Credit Suisse:

We have been long-time supporters of the Pfizer story and see opportunities for upside over the long-term, but see more limited drivers of upside over the next 6-12 months, leading us to recommend other stocks in our coverage, such as Johnson & Johnson, which we reinstated today with an Outperform rating, and Merck. Pfizer has had success in recent years from the uptake of Ibrance and Prevnar, but Ibrance’s growth is slowing while global Prevnar sales are flat to declining. In addition, the company is facing two meaningful patent expirations over the next 18 months (Viagra, Lyrica) that will pose a further headwind to both top and bottom-line growth. Pfizer has taken steps to boost its inorganic growth, but we believe Eucrisa (via Anacor) is too small to move the needle in the near-term while Xtandi (via Medivation) is facing reimbursement challenges as well as the threat of generic versions of key competitor Zytiga next year. Further M&A/business development will likely be pursued, but small to mid-sized deals may not be significant enough to move the needle, while it appears other factors may need to be sorted out before Pfizer will be ready to pursue a larger deal… Our 2017/2018/2019 EPS estimates are now $2.53/$2.71/$2.78 (from $2.57/$2.78/$2.82).

As for the other three:

  • Merck & Co., Inc. (NYSE: MRK) has an Outperform rating with a $75 price target. Overall Credit Suisse sees Keytruda continuing to drive upside in Merck over the next 6-12 months but the firm realizes the company needs more from their pipeline or from business development to maintain excitement on the story over the longer term.
  • Credit Suisse has an Outperform rating for Eli Lilly with an $89 price target. The firm maintained its Outperform rating based on Eli Lilly’s diverse and relatively de-risked product story and what it sees as a positive outlook for several core franchises.
  • The brokerage firm has a Neutral rating for Bristol-Myers with a $58 price target. This rating was given in consideration of a potentially challenging competitive news-flow over the next few months.

Shares of J&J most recently closed at $136.57, with a consensus analyst price target of $137.94 and a 52-week range of $109.32 to $137.07.

Shares of Pfizer were last seen at $33.54. The stock has a 52-week range of $29.83 to $37.39 and a consensus analyst price target of $37.50.

Shares of Eli Lilly closed Thursday’s session at $84.75, with a consensus analyst price target of $90.14 and a 52-week range of $64.18 to $86.72.

Shares of Bristol-Myers most recently closed at $55.44, with a 52-week range of $46.01 to $76.80 and a consensus analyst price target of $57.50.

Shares of Merck were last seen at $62.94. The stock has a 52-week range of $51.80 to $66.80 and a consensus analyst price target of $69.55.