Two Big Pharma Stocks Were Dow’s Best, but 2019 Looks Shakier

December 31, 2018 Updated: December 31, 2018

In a year where U.S. stock-market indexes rallied to records and then reeled back amid concerns over an international trade war, pharmaceutical giants Merck & Co. and Pfizer Inc. were kings of the Dow.

The drugmakers rose along with the rest of the Dow Jones Industrial Average in a summer rally, then outlasted the market’s autumn decline. Through Dec. 28, the pair were the top performers in the 30-stock Dow. On the broader S&P 500 Index, another big drug company, Eli Lilly & Co., was among the 20 largest gainers.

While President Donald Trump’s wrangling with major U.S. trading partners battered some industries, his threats on drug prices couldn’t stop the three companies from adding more than $100 billion in market value over the course of the year.

Investors who have watched health stocks lead the market one year only to fizzle the next may doubt whether the gains can continue. One of the S&P 500’s top performers in 2017, dental company Align Technology Inc., is set to finish 2018 in the middle of the pack, down about 6 percent since the start of the year.

Additionally, drug stocks that once seemed like bargains now look pricier than other pockets of the market. Valuations for 2018’s top-performing pharmaceutical companies are more out of line with stocks that have gone on sale thanks to the broader market’s declines.

“There’s much less upside in some of the large-cap pharma names like Lilly and Pfizer,” Jefferies health-care specialist Jared Holz said by phone. “Large-cap pharma names being up a minimum of 20 percent over less than six months is fairly unprecedented,” while some large biotechnology companies are trading near record-low valuations, he said.

“It’d be my guess that they’ll run out of gas heading into the year,” said Brad Loncar, a biotech investor and chief executive officer of Loncar Investments. “I don’t think they’ll be bad stocks, I just don’t think they’ll be the high-fliers that they’ve been this year.”

Some of the run in the drug stocks has come as investors traded out of more highly valued industries and into pharma. Companies in the S&P 500 Pharmaceuticals Index drew higher valuations from investors as the year went on, but for the broader S&P 500, the reverse was true. That’s evidence that as the market wobbled this fall, investors may have rotated into lower-priced drug stocks.

It also doesn’t take much to wipe out billions of dollars of value in the drug industry. A bad clinical trial or a patient-safety issue can roil a company’s shares, especially after some investors poured money into health stocks as a safe haven.

Johnson & Johnson lost about $50 billion in market value during a two-day drop this month as investors sized up the liabilities for mounting lawsuits centered on claims its baby powder caused cancer. The shares are set to close out their worst year since 2008.

With investors on edge amid a volatile market and political situation in Washington, “negative news will be amplified and positive news is going to be muted,” Bloomberg Intelligence analyst Sam Fazeli said.

 

For the pharma boom to keep gong, analysts said, the companies will have to continue to deliver new drugs and earnings growth — with no slip-ups.

“The mood is about as bad as it could possibly get, and everyone is waiting for capitulation,” Loncar said. “A number of unique elements came together at the same time and made them attractive stocks to get into.”

 

By Bailey Lipschultz

From Bloomberg

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