Large-cap pharmaceutical stocks have underperformed the S&P 500 this year, pressured by the political climate and earnings estimate revisions, according to Goldman Sachs.
"While a challenging macro environment including pricing scrutiny is likely to persist, we expect in line [first-quarter] results with FX (foreign exchange) reversal tailwinds driving upside to guidance," Goldman analysts led by Jami Rubin wrote in a note on Friday, noting that investors in pharmaceuticals have been too distracted by currency issues, which seem to finally be subsiding.
"As exchange rates stabilize (ex-Venezuela and certain other markets), we expect investors to focus on what we expect to be solid revenue growth" at companies like Bristol-Myers Squibb (BMY) - Get Report , AbbVie (ABBV) - Get Report and others, the note said. However, despite underlying strength, Allergan (AGN) - Get Report , Teva Pharmaceuticals (TEVA) - Get Reportand Mylan (MYL) - Get Report may report soft first-quarter revenue due to "seasonality," while Perrigo (PRGO) - Get Report "faces fundamental challenges putting estimates at risk," the note said.
The largest opportunity in pharma stocks to drive margin expansion is new products, especially related to immuno-oncology. First-quarter results are "likely to reinforce our long-held view," the analysts wrote.
"We see the greatest potential for margin expansion at BMY driven by Opdivo; we also we also expect significant margin improvement for ABBV, Eli Lilly (LLY) - Get Report , Merck (MRK) - Get Report and Pfizer (PFE) - Get Report .
Here's a look at Goldman's top picks for the pharma sector as the group gets ready to report quarterly earnings results. We've paired the list with commentary from Jim Cramer if the stock is owned by his Action Alerts PLUS charitable trust portfolio.