Big Pharma Disappoints on Revenues, Earnings

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While pharmaceutical stocks have been a standout sub-sector within health care this year, earnings have been disappointing, leading some analyst to call it a trend.

Pharmaceutical companies have seen a 4.7 percent contraction in earnings, and a 3.2 percent drop in revenue this quarter, according to Thomson Reuters. That is more of the same for pharmaceutical companies, which have seen a decline in earnings and revenue growth in each of the past four quarters, said Greg Harrison at Thomson Reuters.

Morningstar pharmaceutical analyst Damien Conover said there are two main reasons: Foreign-exchange rates are hurting year-over-year growth, especially when it comes to the yen. What's more, generic competition has been more intense than in the past, meaning as a drug loses patent protection the branded drug sales fall faster.

For example, in late 2011, Pfizer lost its patent exclusivity of cholesterol-lowering blockbuster Lipitor. And Merck lost its patent protection on blockbuster allergy drug Singulair in 2012.

To offset the losses associated with these drugs, large-cap pharma has been aggressively building out its drug pipeline, organically and inorganically. But the process of taking a drug through research and U.S. Food and Drug Administration approval takes time and is costly.

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Regardless of the headwinds facing this sector, pharmaceutical companies this year have been getting rewarded for their attractive dividend yield, which on average is 2 percent higher than stocks on the S&P 500.

"For defensive investors, we think pharmaceutical companies still represent a good relative value with compelling dividend yield," said Seamus Fernandez, a pharmaceutical analyst at Leerink Swann.

In the near-term, however, Fernandez said there could be a rotation out of big pharma. "We think broad-based buying of pharma will stall and money [will] rotate out of the group if cyclicals begin to outperform."