Investors in big pharma, biotech look to ride out Trump storm

A logo of drugs and chemicals group Merck KGaA is pictured in Darmstadt, Germany on Jan 28, 2016.
A logo of drugs and chemicals group Merck KGaA is pictured in Darmstadt, Germany on Jan 28, 2016. PHOTO: REUTERS

NEW YORK (REUTERS) - Investors in large US pharmaceutical and biotech companies are counting on strong dividends, reasonable stock valuations and new products to help ride out a storm of political uncertainty as the incoming Trump administration dives into healthcare policy.

The sector took a pounding on Wednesday (Jan 11) after US president-elect Donald Trump said the drug industry was "getting away with murder" on medicine costs, suggesting that the specter of government actions on pricing is not going away any time soon.

The industry faced critical scrutiny during much of the presidential election campaign last year.

But despite the potential for political volatility ahead, some investors are finding reasons to hang onto shares of drugmakers.

"We do think they are generating a lot of cash, throwing out a very nice dividend and the valuations are more reasonable than many areas of the market," said David Katz, chief investment officer at Matrix Asset Advisors in New York, which owns stock in Merck, Pfizer, AbbVie and Gilead .

"We definitely are worried and aware" of pricing concerns, Katz said.

"But we think when all is said and done they are going to muddle through it - and the stocks are too cheap."

While the S&P 500 companies are overall trading at prices well above their traditional valuations, a group of pharmaceutical stocks in the index recently has traded at 14.8 times earnings estimates for the next 12 months, below their 16.4 average over the past three years, according to Thomson Reuters Datastream.

Shares of Gilead, which also faces questions about its hepatitis C franchise sales, are trading at around 7 times forward earnings, while fellow biotech giant Amgen is trading at 12.5 times.

Merck, whose shares have climbed in the past two days after positive developments for its cancer treatment Keytruda, holds a higher P/E ratio of 16.3 times. But even that is lower than the 17 times for the S&P 500 as a whole.

Large drugmakers and a few biotech companies also offer solid dividend payouts. The group of S&P 500 drugmakers are yielding 2.85 percent, which is above the S&P 500's yield of 2.4 percent and slightly ahead of the 2.83 percent for the S&P 500 consumer staples index, which includes companies known for their high dividends.

Drugmakers "have long track records of paying those dividends and regularly increasing them," said George Strietmann, portfolio manager with Cincinnati investment advisory firm Bahl & Gaynor.

"The market looks at that as a very strong part of the foundation of owning the stocks." Bahl & Gaynor owns shares of AbbVie, which has a dividend yield of 4.2 percent, and Merck, which is yielding 3.1 percent.

Smaller biotech and pharma companies do not offer such dividends, leaving them with potentially less cushion than their larger peers should drug-pricing pressures increase.

Regardless, Peter Jankovskis, co-chief investment officer at OakBrook Investments in Lisle, Illinois, said he is "very optimistic" about pharma and biotech, noting that "many of them are extremely beaten down."

"We think it's a great sector to be in," Jankovskis said,"and whether we get the benefit of it in the next few months or over the next couple of years, either way we think we're going to come out ahead."

Some investors remain concerned about the sector. Investors should be wary about companies that derive a lot of revenue from big government health programmes such as Medicare and Medicaid, said Kim Forrest, senior equity research analyst at Fort Pitt Capital Group in Pittsburgh.

"We think that investors should really pay attention to where the money comes from in these companies, who the buyer is," Forrest said.