This week has been brutal for investors as the markets retraced the lion’s share of the gains that came off the bottom of the late summer, early fall correction. However, before panicking and just selling everything, investors should remember that this has been an event-driven sell-off, not a fundamental one, as evidenced by Friday’s strong nonfarm payroll numbers. While China has issues, and some will affect the United States, the U.S. economy continues to chug along at a slow, but sure pace. And while the Middle East situation is delicate, history shows that is has been the case for the past 70 years.
One good plan for stockholders who are seeing gains evaporate is to rotate to a more defensive sector. Large cap pharmaceutical stocks totally fit the bill. They have solid growth potential, but few are thrown out by portfolio managers with the momentum stock bath water.
We screened the Merrill Lynch research database universe for the top mega cap pharmaceutical stocks that are rated Buy and found four for investors to consider now.
Abbott Laboratories
This top pharmaceutical stock has very solid growth potential. Abbott Laboratories (NYSE: ABT) is a leading diversified global health care company that develops, manufactures and markets branded generics, medical devices, nutritional products and diagnostic solutions. It recently agreed to acquire the equity in Minnesota-based Tendyne that it does not already own for $250 million plus future payments tied to regulatory milestones. Merrill Lynch likes the purchase and the way the company is putting its substantial balance sheet to work.
The company also offers a diversified large cap play as earnings are split between five well-positioned business segments: Nutritionals (31% of revenues), Vascular (13%), Generic Pharmaceuticals (20%) and Diagnostics (25.5%) and Diabetes (10.5%).
Third-quarter earnings were solid and the emerging market sale growth continues to impress. Merrill Lynch has advised investors since the August sell-off to stay with the company.
Investors receive a 2.50% dividend, which was just recently raised. The Merrill Lynch price target for the stock is $53, and the Thomson/First Call consensus price target $51.47. Shares closed Thursday at $41.54.
[recirclink id=307600]
Eli Lilly
This stock checks in at high on the global pharmaceutical lists at many top Wall Street firms, including the Merrill Lynch US 1 list. Eli Lilly and Co. (NYSE: LLY) is a global health care company with numerous core products in a number of primary-care pharmaceutical markets. It generates revenues from its pharmaceutical product and animal health segments. The product portfolio includes Zyprexa (for schizophrenia and bipolar disorder), Gemzar (pancreatic cancer), Evista (osteoporosis), Cymbalta (depression), Cialis (erectile dysfunction), Strattera (attention deficit hyperactivity disorder), Erbitux (cancer) and Alimta (chemotherapy). Eli Lilly also has a strong presence in the diabetes market.
Third-quarter earnings came in above consensus estimates, but revenues fell short, reflecting some potential generic competition for Cymbalta and Evista in the United States, as well as some negative currency movement. Trajenta, Strattera, Forteo and the animal health business should all help to offset the impact of genericization of former top-selling drugs. While fourth-quarter estimates were lighter than expected, Merrill Lynch remains very positive on the stock.
The company’s new cancer drug Cyramza won FDA approval for label expansion late last year. It treats patients suffering from metastatic colorectal cancer. This was the fourth Cyramza approval in a one-year period, as it already has approval to treat advanced or metastatic gastric or gastroesophageal junction adenocarcinoma and metastatic non-small cell lung cancer.
Shareholders receive a solid 2.51% dividend. Merrill Lynch has a $108 price target. The consensus target for the stock is $99.85. Shares closed Thursday at $81.41.
Merck
This remains a leading health care stock that is on the focus lists of many of the firms we cover. Merck & Co. Inc. (NYSE: MRK) sells numerous prescription medicines, vaccines, biologic therapies and consumer care and animal health products, provided to customers in more than 140 countries. Merck is the world’s fourth-biggest drugmaker by revenue and boosted its annual profit forecast earlier this year.
Recently Merck announced very encouraging data from two pivotal Phase 3 clinical studies for its investigational antitoxin bezlotoxumab for prevention of recurrence of clostridium difficile infection. Data from the studies dubbed MODIFY I and MODIFY II evaluated the use of bezlotoxumab alone or in combination with actoxumab. Both the studies met their primary efficacy endpoint.
Back in the fall, the FDA granted breakthrough therapy designation to Merck’s Keytruda, as the company managed to prove that the drug is better than existing therapies for treating non-small cell lung cancer. However, the relationship between Keytruda use and survival rate or disease symptoms is yet to be conclusively proved.
Merck shareholders receive a 3.54% dividend. The Merrill Lynch price target is $63. The consensus target is $62.26. Shares closed Thursday at $51.96.
Pfizer
This one could be offering investors perhaps the best value at current trading levels. Pfizer Inc. (NYSE: PFE) has a very strong pipeline, and being the world’s largest drug manufacturer by sales value supports the Wall Street notion that the company can generate higher long-term revenues through the accelerated growth of its new drugs over the next five years. Pfizer recently announced the details in what would be one of last year’s biggest deals, a $160 billion merger with Allergan.
The Treasury Department announced that it is working on new rules for corporate tax inversions, which is potentially what the Pfizer/Allergan deal would be. That could possibly throw a wrench into the negotiations. The analysts still maintain that the standalone value for the pharmaceutical giant is $45.
Pfizer has announced that it is starting 20 clinical trials this year and more soon after on treatments to conquer cancer as it also seeks to gain leadership in one of the hottest, and most lucrative, areas of medicine. Pfizer currently has eight approved cancer medicines, four of them launched in the past four years. It is running late-stage patient tests on five of those drugs for additional uses and has three other drugs in late-stage testing, which is usually the last round before seeking regulatory’ approval. In addition, the company has 14 other drug programs in early stages.
Investors receive a tidy 3.80% dividend. The $40.44 consensus price target is higher than the $39 Merrill Lynch target. Pfizer closed Monday at $31.40.
[recirclink id=307688]
With political sabre rattling over drug pricing continuing to remain front and center during the 2016 election year, the reality is these companies all provide drugs, and in some cases medical devices, that help hundreds of thousands of people daily lead a better life. They make good sense for conservative portfolios looking for income and growth this year, especially with the market very volatile.
Top Gaining Stocks
Top Losing Stocks