Goldman Sach's 5 Large-Cap Pharma Stock Favorites Ahead of Earnings

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 Report)  and 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.

 

 

 

 

Bristol-Myers Squibb
Bristol-Myers Squibb

Bristol-Myers Squibb (BMY - Get Report) is a stock on Goldman Sachs' Conviction Buy list, with a price target of $80.

The New York-based biopharma company reports quarterly earnings on April 28. Analysts, according to Thomson Reuters, estimate that Bristol-Myers will record a profit of 64 cents a share, down 10% from last year's period. Revenue is expected to rise 5% to $4.23 billion.

"We continue to believe that BMY remains the best new product story across all of biopharma, with upside pressure to EPS forecasts," the analysts wrote in Friday's note. "Opdivo and Eliquis represent $8 billion and $4 billion drugs by 2020, respectively, with significant upside to both drugs. Most importantly, we see BMY's front runner status in I-O [immune-oncology], which includes Opdivo, Yervoy, and multiple new mechanisms for combinations, to drive a significant transformation in BMY's earnings power."

AbbVie
AbbVie

Goldman Sachs rates AbbVie (ABBV - Get Report)  a buy and raised its 12-month price target by $4 to $72.

The Chicago-based pharma company reports quarterly earnings on April 28. Analysts, according to Thomson Reuters, estimate that AbbVie will record a profit of $1.14 a share, up 21% from last year's period. Revenue is expected to rise 19% to $6 billion.

"We continue to believe that Humira will remain a durable asset free of U.S. biosimilars, at least until the end of the decade," the analysts wrote. "Though we continue to see substantial obstacles to biosimilar market penetration, headwinds to investor sentiment arising from various IP challenges have become harder to disprove."

"Meanwhile, [first quarter] results are likely to be solid in our view demonstrating the resilience of Humira in the U.S. driven by a mix of favorable volume and pricing, and ex-U.S. where biosimilar versions of competing anti-TNFs have yet to make an impact -- although FX will continue to drag on [first quarter] growth, it will likely dissipate over the course of the year," they added.

Allergan
Allergan

Goldman Sachs rates Allergan (AGN - Get Report) a buy and recently placed a $275 price target on the stock, following its failed merger with Pfizer PFE.

The specialty pharmaceutical company reports quarterly earnings on May 6. Analysts, according to Thomson Reuters, estimate that Allergan will record a profit of $3.04 a share, down 29% from last year's period. Revenue is expected to fall 6% to $3.96 billion.

"We recently reinstated AGN with a Buy rating ... with a $275, 12-month price target, arguing that the market value for the generic business (being sold to Teva Pharmaceuticals for $40.5 billion) has disappeared from the stock," the Goldman analysts wrote. "We believe investors have been concerned about first quarter and expectations have tempered given seasonality and FX. We believe the strength in topline is going to be more back-end loaded, particularly as new product launches gain momentum."

Allergan is a holding in Jim Cramer's Action Alerts PLUS portfolio.

"Closing the Teva deal is undoubtedly crucial for Allergan, as it will allow it to pay down its debt and open the balance sheet for further accretive capital returns (via buybacks and/or accretive acquisitions)," Cramer and Jack Mohr, research director for Action Alerts, wrote in a recent weekly roundup. "Ultimately, we believe both management teams will reiterate commitment to the deal on their upcoming earnings calls. Amid the rubble, we see brighter days ahead. We reiterate our conservative $270 target."

Teva Pharmaceuticals
Teva Pharmaceuticals

Goldman Sachs rates Teva Pharmaceuticals (TEVA - Get Report) a buy, with a $70 price target on the stock.

The Israeli-based pharmaceutical company reports quarterly earnings on May 9. Analysts, according to Thomson Reuters, estimate that Allergan will record a profit of $1.14 a share, down 14% from last year's period. Revenue is expected to fall 4% to $4.78 billion.

"We expect much of the investors' focus will be on an update on the timing or progress related to closing the Allergan deal," the note said. "We believe this quarter will be weak for U.S. generics given seasonality and the lack of new product launches, as well as tough comps given Pulmicort contribution in [first quarter 2015]."

Mylan
Mylan

Mylan (MYL - Get Report) is a stock on Goldman Sachs' Conviction Buy list, with a price target of $60.

The U.K-based specialty pharmaceutical company reports quarterly earnings on May 3. Analysts, according to Thomson Reuters, estimate that Allergan will record a profit of 75 cents a share, up 7% from last year's period. Revenue is expected to increase 19% to $2.23 billion.

"We continue to prefer MYL in the generic space and believe the stock looks inexpensive," the analysts wrote. "MYL is now trading at ~8x management's 2017/2018 EPS guidance of $6.00, which we believe to be low when considering potential for double digit top and bottom line growth over the next several years."

"As telegraphed on the 4Q earnings call, we expect 1Q to be a seasonally weak quarter on the topline with new product launches mostly expected in the remaining quarters of the year. We also expect seasonality in spend with much lower gross margins and higher R&D spend in 1Q relative to FY expectations. We expect the focus in the quarter would be on any updates on the pending Meda deal," they added.

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