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Pharma Stocks: The Patent Expirations Trade

Tuesday, 26 Jul 2011 | 2:01 PM ET

As patents expire, will health-care stocks plunge?

In the next 14 months, patents for the top 20 drugs in the U.S. are set to expire. Although makers of top-selling drugs, such as Lipitor and Plavix, will no longer have a monopoly on these drug formulas, pharmaceutical stocks will be able to weather the loss of these patents, two health-care analysts say.

The upcoming patent expirations are built into the prices of health-care stocks, with many of them trading at massive discounts to the S&P 500, Seamus Fernandez, a managing director at Leerink Swann, told CNBC.

Expiring Patents & Drug Stocks
Is it time to cash out of drug stocks if you own soon-to-be expired patented pharma stocks? Insight with Seamus Fernandez, Leerink Swann and Catherine Arnold, Credit Suisse.

"Honestly we're starting to look at these stocks, and we think investors are looking at these stocks on post-cliff valuations—what we call the patent cliff, which we are really weathering a pretty major storm in 2012," Hernandez added. "But prospects are improving; pipelines are starting to look better. We actually think that this is an interesting time to take a look, but to take a selective approach."

Catherine Arnold, a managing director and senior research analyst at Credit Suisse, echoed this optimism about the sector.

"The industry's been bracing for this for a long time," she said. "We've been talking about this ad nauseum for an extended period of time. The growth does slow, but then you start to see it pick up as you move towards 2015."

Although the health-care sector is projected to lose about $90 billion from 2011 to 2015, which Arnold said would be hard on gross margins, she still sees potential in health-care stocks.

Arnold named two stocks in particular that she liked—Forest Labs and Pfizer, which she called "underappreciated" and said would be releasing four additional drugs this year. Pfizer is also currently undergoing a restructuring effort.

Fernandez's picks included Allergan , which he said had "great growth in the near term,"and Sanofi-Aventis , a stock he said that has a multiple that does not reflect its post-cliff growth.

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Disclosures:

Disclosure information was not available for Seamus Hernandez, Catherine Arnold or their companies.

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