Merrill Lynch Bullish on Deep Value Pharmaceuticals: 5 Stocks to Buy for 2018

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With the market looking ready to continue running to all-time highs despite yesterday’s selling, many pundits feel this late stage part of the rally is more people trying to get on board for fear of missing out than actually true investment dollars coming in. The only problem with that is the economy, and the macro picture, need to stay almost perfect. If the tax reform doesn’t pass, or a war breaks out in the Middle East or Korea, all bets are off.

One good area to look at in this overbought and pricey market is the big and specialty pharmaceuticals, and the analysts at Merrill Lynch are out with reinstated coverage on 10 companies, including five that are rated Buy that they consider to be “deep value” plays now.

AbbVie

This is one of the top pharmaceutical stocks picks across Wall Street. AbbVie Inc. (NYSE: ABBV) is a global, research-based biopharmaceutical company formed in 2013 following separation from Abbott Laboratories. The company develops and markets drugs in areas such as immunology, virology, renal disease, dyslipidemia, and neuroscience.

One of the biggest concerns with AbbVie is what might eventually happen with anti-inflammatory therapy Humira, which has some of the largest sales for a drug ever recorded. Last year the patent board instituted Coherus’s Inter Partes Review against the Humira ‘135 patent. The problem with Humira is that biosimilars and generics are itching to enter the market.

The Merrill Lynch team feel that based on the strength of Humira formulation patents and patent litigation timelines, they do not expect U.S. biosimilars until 2023. They also note that Abbvie’s next-gen immunology agents should partially mitigate Humira revenue that will be eventually lost to biosimilars.

Shareholders in AbbVie are paid a solid 2.96% dividend. The Merrill Lynch price target for the shares is $103, and the Wall Street consensus target is $98.20. The stock was trading early Thursday at $96.70 per share.

Allergan

This stock has taken a beating this year and is offering an outstanding entry point for investors. Allergan PLC (NYSE: AGN) is a specialty pharmaceutical company that develops, manufactures and markets branded products. The company’s growth has been driven largely by acquisitions supported by internal growth.

Allergan markets a portfolio of best-in-class products that provide valuable treatments for the central nervous system, eye care, medical aesthetics, gastroenterology, women’s health, urology, cardiovascular and anti-infective therapeutic categories, and it operates the world’s third-largest global generics business, providing patients around the globe with increased access to affordable, high-quality medicines.

Allergan is an industry leader in research and development, with one of the broadest development pipelines in the pharmaceutical industry and a leading position in the submission of generic product applications globally. The Merrill Lynch analysts note the company’s Aesthetics leadership and that the substantial pipeline optionality is not priced in. And with Restasis now a zero, 2018 estimates represent a clean trough multiple year.

Allergan shareholders are paid a 1.6% dividend. Merrill Lynch has a price target of $204 per share, and the posted consensus price objective is $229.70. The shares traded at $175.50 Thursday morning.