Pharmaceutical Stocks May Be the Best Total Return Play: 3 to Buy Now

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If one sector has struggled this year it has been the health care sector, which is surprising given that usually it is considered to be very defensive. But ever since a Hillary Clinton tweet last year about drug pricing, the sector has been under pressure especially the pharmaceuticals. But with yields plunging, and the market getting very pricey, the top stocks are starting to look like a great total return vehicle for the rest of this year and 2017.

A new Jefferies research report reiterate the firm’s top buy in the sector and notes that while performance in the sector has been weak, some of the macro issues that started the pressure last year may be fading:

We continue to see strong underlying fundamentals in Large Cap Pharma, with the next 12 months beginning to heat up as we head towards a very rich set of catalysts. Whilst the FX headwinds may increase for many companies (excluding GlaxoSmithKline and AstraZeneca at the level of EPS), we now see a more even balance between the overhang around US pricing from the upcoming US Presidential election and the search for yield, post Brexit, which could benefit many companies in our universe.

We screened the firm’s universe and found three stocks that make good sense now.

AbbVie

This stock is the top global pharmaceutical stocks at Jefferies and is also on the Franchise Stock Picks list. AbbVie Inc. (NYSE: ABBV) is a global, research-based biopharmaceutical company formed in 2013 following separation from Abbott Laboratories. The company’s mission is to use its expertise, dedicated people and unique approach to innovation to develop and market advanced therapies that address some of the world’s most complex and serious diseases. AbbVie employs more than 26,000 people worldwide and markets medicines in more than 170 countries.

One of the biggest concerns with AbbVie is what eventually might happen with anti-inflammatory therapy Humira, which generated $14 billion in sales in fiscal 2015. That was the most any drug has recorded during a single year and represents a gigantic part of the company’s overall earnings. The problem is that biosimilars and generics are itching to enter the market with Amgen leading the charge, and some Wall Street analysts project that AbbVie may have a difficult time stopping that trend.

The patent board recently instituted Coherus BioSciences’ Inter Partes Review against the Humira ‘135 patent. The outcome of the review is expected in 12 months. While most analysts remain positive on Humira duration, the expected litigation uncertainty could continue to create an overhang on the stock.

AbbVie investors are paid an outstanding 3.6% dividend. The Jefferies price target for the stock is $90, and the Thomson/First Call consensus target is posted at $70. The stock traded at Friday’s close at $63.32 per share.