HSBC Sees Opportunity in These 2 Biopharma Giants Ahead of the 2024 Elections

The silly season is upon us. Not the holidays – but the election. We’re less than 11 months out from the Presidential vote, and the first primary, the Iowa GOP caucus, is less than 30 days away.

Election years are the ‘known unknown’ of the US economy. We know they’re coming, we know the results can change everything, we know that every economic sector will react differently – but we never truly know how those changes will shake out.

This cyclical truth of politics and financial markets informs HSBC analyst Rajesh Kumar’s analysis, and he applies it to the biopharmaceutical industry.

Laying out the case, Kumar writes, “The year of US elections often can be a source of angst for Biopharma investors, especially with the ongoing drug pricing debate. Given Medicare, empowered by the US Inflation Reduction Act (IRA), has embarked on the first round of price negotiations, we think 2024 will see a heated debate on the impact of drug pricing on the Biopharma industry’s earnings power… MedTech names could prove to be the least affected by the US election next year, especially given their lower cyclicality in a weak macro environment. Add any interest rate cuts, and the preference for longer duration names could shift investor interest disproportionately into the space.”

Meanwhile, against this backdrop, Kumar has singled out two biopharma giants, both large-cap stocks, that present investor opportunities as we head into 2024. We’ve used the TipRanks platform to see what it is about these names that makes them stand out from the pack.

Teva Pharmaceutical (TEVA)

We’ll start with a biopharma firm, Teva Pharmaceutical. This company is best known as a manufacturer of generic drugs – that is, drugs whose patent protections have run out, and can now be manufactured under off-brand labels. The generic drug market is huge – estimated by Statista at more than $410 billion last year, and expected to reach over $600 billion by 2030 – and Teva is perennially counted among the 5 largest drug makers in this important biopharma segment.

Teva describes its mission as making the world’s highest quality medicines accessible to the largest possible segment of the public. To this end, the company has the largest product portfolio of any biopharma firm, with more than 3,500 different products available in 60 countries around the world. This portfolio includes a heavy emphasis on generics, but Teva also works to develop wholly-owned new drugs, and engages in partnerships with other drug companies. Teva boasts that every day, some 200 million people globally take a Teva medicine, and that in the US alone more than 1 million prescriptions are filled on a daily basis with a Teva product.

The company’s varied pharmaceutical operations are only one note of interest to investors. During 2023, Teva has seen a shakeup in upper management. The company brought on a new CEO in January, and in September announced a new Exec VP for North American Commercial operations.

The new management will have its hands full. As Kumar noted in his industry report, election years bring changes for the pharmaceutical industry. Candidates make promises on drug prices, on Federal spending, and on benefit packages for Medicare/Medicaid – and after the election, the winners have to follow through. For a company like Teva, specializing in relatively low-cost generic drug options, this can present a rich field of opportunity as a supplier when new budgets are written.

In the meantime, we can take a look at Teva’s last quarterly report, from 3Q23, to see where the company currently stands. Teva reported $3.9 billion in global revenue, up 7% year-over-year and $160 million over the forecast. At the bottom line, Teva’s earnings came in at 60 cents per diluted share, by non-GAAP measures. This figure missed expectations by a single penny per share.

As for the HSBC view, analyst Kumar highlights several points to support the bull case. He writes, “We think that the new management may bring change to Teva’s status quo. A more focused approach in the generics business on higher value opportunities should stabilize revenue and a disciplined plan to pay down debt will lower leverage. In addition, the company now has a few promising assets in the innovative medicine business, including AUSTEDO (HSBC estimates peak sales USD2.2bn in 2031) and the next generation TL1A for Inflammatory Bowel Disease treatment, which has shown great market potential. We think external collaboration with branded pharma players such as Sanofi on the innovative assets can bring more margin of safety for clinical development.”

Looking ahead, Kumar rates the shares as a Buy, with a $13 price target to suggest a 25% upside in the next 12 months. (To watch Kumar’s track record, click here)

The view from the Street on Teva is a Moderate Buy, based on 7 recent analyst recommendations that include 4 to Buy, 2 to Hold, and 1 to Sell. The shares are priced at $10.43, and their $11.83 average price target implies a one-year gain of 13.5%. (See Teva stock forecast)

Thermo Fisher Scientific (TMO)

The second stock we’ll look at is from the medical technology, or medtech, segment. Thermo Fisher produces and supplies the multitude of products that research laboratories, especially medical research labs, need to conduct their work. TMO’s own product lines include such items as chemicals and reagents, sampling and testing supplies, scientific instruments, and the software systems that run labs and lab equipment. Thermo Fisher serves clients in any line of work involving laboratory research, and counts academics, medical researchers, government organizations, and research universities among its customer base.

As analyst Kumar noted, medical technology firms should face less of a challenge from election year antics. These companies work behind the scenes, and in Thermo Fisher’s case, the customers will still have need of lab equipment and products no matter how the pharmaceutical firms react to the election results – the lab work that underlies medical innovation will continue.

Supporting scientific research labs is big business; Federally supported R&D centers were funded to the tune of $26.5 billion in 2022 – and that figure does not include privately funded ventures or international research and development work. Thermo Fisher has a rich field of opportunity, and brought in over $44.9 billion in total revenue last year.

This year, however, Thermo Fisher’s revenues are down slightly. For the first nine months of 2023, the company’s revenue total of $32 billion is down 4.4% from the same period last year. A close look at the 3Q23 numbers shows that the $10.57 billion in quarterly revenue was down 1% y/y and missed the forecast by $70 million. On the other hand, the company’s earnings – the non-GAAP EPS – were up 12% y/y to $5.69 per share. This earnings figure was 8 cents per share better than the forecast. Company management attributed the earnings growth to a 200-basis point expansion in operating margins.

Turning once again to Rajesh Kumar and the HSBC view, we find the analyst upbeat on Thermo Fisher’s prospects going forward. He says of the stock, “With the potential for a cyclical recovery in the Life Science tools market and one of the better execution stories, we think the company is set for a return to high single-digit (7-8%) organic growth. While the company has re-calibrated market’s expectations down for 2024 towards H2 weighted growth, our analysis of leading indicators and supply chain offers confidence regarding such a return to growth. With a market-leading M&A platform, and more sensible valuations in the tools market, we think the company should be in a strong position to augment such growth with bolt-on deals.”

Kumar quantifies his stance with a Buy rating and a $610 price target that points toward a one-year upside potential of 15.5%. (To watch Kumar’s track record, click here)

TMO shares hold a Strong Buy consensus rating from the Street, based on 22 ratings with a 17 to 5 breakdown favoring the Buys over the Holds. That said, the average price target of $547.80 implies shares have room for only modest growth of 4% for the next year. (See TMO stock forecast)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.