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Drug Stocks Do Well in ‘Gloom and Doom’ Market: Analyst

Wednesday, 8 Feb 2012 | 12:05 PM ET
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Drug company stocks only do well in a “gloom and doom” market where they look good by comparison, Sanford Bernstein analyst Jack Scannell told CNBC Wednesday.

These stocks have underperformed, he said, and “if you are a macro bull you wouldn’t want to own them. If you’re a macro bear you would.”

In Scannell’s view, the late 1990s was an unusually productive time for research and development, with a large number of very valuable drugs discovered. But that has been declining, he said, and the patents will soon be expiring.

“That’s why we see saw a severe contraction in multiples in the late 1990s until about 2009,” Scannell said.

Drug Stocks Will Only Do Well if We Have Doom and Gloom: Analyst
Jack Scannell, research analyst at Sanford C. Bernstein, told CNBC, "if you are a macro bull you wouldn't want to earn drug stocks, if you are a macro bear you would. The second half of 2011 was a very good time for drug stocks, not because the fundamentals of the pharmaceutical sector were getting better, but because they bottomed out, expectations were low, dividends yields were 4 to 5 percent and medium term earnings were highly predictable.

As a result, the only period of outperformance for drug stocks is when the market is going down.

“So the second half of 2011 was a very good time for drug stocks, not because the fundamentals of the pharmaceutical sector were getting better, but because they bottomed out, expectations were low, dividends yields were 4 to 5 percent, and medium-term earnings were highly predictable," he said.

That predictability is one of the few advantages of these stocks thanks to the patent expiration dates, he added, noting that will be a bad year for AstraZeneca because it has patents expiring, for instance. At the same time, he said some therapy areas have been seeing productivity increasing.

“In drug stocks, once you’ve got a successful product it will grow for many, many years,” he said, giving no recommendations one way or the other.

Additional News: Most Promising Pharma Stocks?

Additional Views: A Bull's Case for Drug Stocks

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Disclosures:

Disclosure information was not available for Jack Scannell or his company.

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