Fears about the coronavirus pushed stocks into a bear market this week with the major indexes dropping more than 20% from their all-time highs reached just last month.
Since mid-February, the Dow is down more than -28%, and the S&P 500 and Nasdaq are both down nearly -27%.
As investors search for safety, JPMorgan says there are three pharmaceutical stocks that look appealing.
JPMorgan analyst Chris Schott wrote in a note this week that he sees an “increasingly attractive setup” for Big Pharma as a sector given low valuations, a more favorable political and regulatory outlook, and products in the pipeline or already on the market.
While the drug sector trailed the market last year, gaining just 15% versus 32% for the S&P 500, the sector has slightly outperformed the broader market this year which should continue.
Schott argues that the coronavirus will have a limited impact on drug companies’ financial results this year given that these companies have globally diversified supply chains and maintain ample inventories so that they can avoid shortages should disruptions arise. The analyst also notes that demand for prescription drugs is “fairly inelastic,” and thus sales should hold up even if the broader economy slows down.
Schott says that Eli Lilly is one of the “best positioned growth stories” in the sector given its recent launches, “important pipeline catalysts” for 2020, and healthy product base. The JPMorgan analyst has an Overweight rating on the stock, and a $150 price target – 19% higher than the current price.
He also maintained his Overweight rating on Merck shares, and issued a $98 price target for the stock – 31.6% higher than the price as of this writing.
The analyst argues that Merck should lift earnings per share at a 12% compound annual rate through 2025, with “clear potential for upside to these estimates.”
And finally, for Bristol-Myers Squibb, Schott sees a “distinctly positive news flow” for the company this year as results come in for several important studies, including for its drug Opdivo for the treatment of lung cancer.
“With shares trading at ~10x our 2020 estimates, we continue to like the BMY setup from here,” Schott wrote. The analyst also rates BMY an Overweight, and has a $74 price target on the stock, indicating 40.6% upside from the current price.