Pharma's cheap stocks spell investment opportunity for traders: JP Morgan

Published Mon, Apr 2 20181:24 PM EDT

Pharmaceutical stocks are trading at one of their largest discounts to the market in nearly 10 years, J.P. Morgan told clients Monday. "This underperformance reflects ongoing drug pricing concerns, many of which are either well reflected in estimates or unlikely to come to fruition for the foreseeable future," analyst Chris Schott wrote. "We see an attractive opportunity to revisit an admittedly out-of-favor sector with a mix of new launch driven sales/earnings upside and capital deployment/M & A representing potential catalysts for the space." Schott stressed that consistently strong fundamentals and recent underperformance in the industry have created a compelling opportunity for health care investors. The only other time the drug group approached this level of discount, Schott wrote, was during 2009 and 2010, when the sector faced a major patent expiration cycle. J.P. Morgan highlighted a number of stocks that could see strong upside over the next several years as a "very healthy" product cycle drives the group to new heights. As the analyst's favorite name in the space, Eli Lilly has fallen more than 9 percent since the start of the year thanks to "overdone" competition fears. "Eli Lilly is a highly diversified company, with growth not dependent on any single asset and we see an opportunity for multiple new product upside drivers in 2018 and beyond," Schott told clients. The analyst has an overweight rating on shares of Eli Lilly as well as a 12-month price target of $105, implying 35 percent upside. Schott also underscored Bristol-Myers Squibb and Allergan, arguing that the pharma group should benefit on the back of newly-enacted tax reform and looser capital. "We see access to trapped cash and ongoing cash flow as a clear positive for the group, expanding capital deployment opportunities, including accelerated M & A and additional shareholder capital return," the analyst wrote. "The potential for sector consolidation remains our top question from meetings and we continue to believe mid/large scale M & A is a clear possibility for the group over the next 12-18 months." Schott has overweight ratings on both Allergan and Bristol-Myers Squibb. He sees upside of 18 percent at Bristol-Myers Squibb and 57 percent at Allergan over the next 12 months.

An employee works on the production of insulin pens at the factory of the US pharmaceutical company Eli Lilly in Fegersheim, France.

Frederick Florin | AFP | Getty Images

Pharmaceutical stocks are trading at one of their largest discounts to the market in nearly 10 years, J.P. Morgan told clients Monday.

"This underperformance reflects ongoing drug pricing concerns, many of which are either well reflected in estimates or unlikely to come to fruition for the foreseeable future," analyst Chris Schott wrote. "We see an attractive opportunity to revisit an admittedly out-of-favor sector with a mix of new launch driven sales/earnings upside and capital deployment/M&A representing potential catalysts for the space."