Credit Suisse Major Drug Stocks to Buy for Great Gains Ahead

Jon C. Ogg

The drug and pharmaceutical sector is supposed to be a defensive one by nature, even if this week's government shutdown and impending debt ceiling weighed heavily on biotech stocks. Credit Suisse's Vamil Divan has initiated coverage of the major pharmaceutical sector with a mostly positive bias, despite a Market Weight rating. Of the seven stocks covered, four were given Outperform ratings, and even the Neutral ratings had price targets assigned that were actually above the share prices.

24/7 Wall St. finds it interesting that the formal sector initiation is a Market Weight rating. That does not sound positive on the surface, until you look at the projected upside of each call in here, when you consider that they are generally slow-moving stocks.

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Divan said that a rising tide will no longer lift all boats and that stock selection is key. He sees modest upside in pharmaceutical stocks based on an improved growth outlook after patent cliffs pass by. Divan also pointed out that positive product catalysts could boost earnings forecasts at the same time that shareholder-friendly capital allocations are following strong free cash flows. He favors companies tied to large molecules and vaccines, as well as high-profit therapeutic exposure.

The report almost sounds cautious until you look at the coverage ratings assigned to these stocks. It is unusual to see big upside given to drug stocks because they are so defensive and much of their cash flow and earnings power become predictable through time. 24/7 Wall St.'s take is that if this was really just a Market Weight sector rating, then these price targets would be much closer to the nominal share prices.

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AbbVie Inc. (ABBV) was started as Outperform and with a price target of $54, versus a $44.52 close Tuesday. The firm said, "Near-term performance is tied to Humira execution and HCV pipeline success, both of which we see as high-quality platforms. ABBV also offers investors significant optionality through their emerging specialty pipeline, and support from strong dividend and free cash flow yield."

Allergan Inc. (AGN) was started as Outperform and with a price target of $104 (versus a $88.96 close). The report said, "We believe Allergan's core franchise strength (Botox, facial aesthetics, glaucoma) is underappreciated and will provide legs for continued growth, while the risk/reward is now favorable given much of the risk around generic Restasis is already reflected in the stock."

Bristol Myers Squibb Co. (BMY) was started as Outperform and with a price target of $55 (versus a $46.60 close). The report said that Bristol Myers "appears best positioned to benefit from a multi-year immuno-oncology (I-O) story that is still in the very early innings. Some of BMY's current marketed products are facing challenges, but we see long-term risk/reward being very favorable given the potential we see in I-O."

Eli Lilly & Co. (LLY) was started as Neutral with a $52 price target (versus a $48.05 close). It was still given a positive note for its diabetes assets launching in 2014, along with a heavy Phase III pipeline.

Forest Laboratories Inc. (FRX) was started as Neutral with a $44 price target (versus a $42.65 close). The firm said, "The recent appointment of a new CEO provides opportunity for a new direction at the company but we await further commentary around his priorities for expense management, capital structure and shareholder returns before getting more constructive on the name."

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Merck & Co. Inc. (MRK) was started as Neutral with a price target of $49 (versus a $47.75 close). The report said, "Merck's top-line growth is flat in light of challenges faced by several core franchises. We do see the vaccines franchise as a bright spot and see room to become more positive on the name should they successfully execute on opportunities they have in the pipeline and on their recently announced expense cuts and shareholder friendly actions."

Pfizer Inc. (PFE) was started as Outperform with a $34 price target (versus a $28.24 close). The firm's research report said, "Pfizer's restructuring story will continue to evolve in the next 2-3 years, while we still see optionality from its emerging specialty pipeline and management's commitment towards shareholder-friendly capital allocation."

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