The U.S. large-cap pharmaceutical industry is the place to be right now because of its history of doing well in tough economic times and cheap share prices, according to Credit Suisse, which initiated coverage on the group late Thursday. The firm said investors still need to be selective in the space, however, naming two top ideas in Merck and AbbVie . Outside of those two favorites, it rates Eli Lilly and Pfizer outperform as well. “With the macro backdrop uncertainty unlikely to resolve over the next few months, we see large-cap biopharma as a key sector to own for defensive exposure at a reasonable price,” wrote analysts led by Trung Huynh in a note entitled “A Refuge from Stormy Seas.” “Despite Pharma’s unchanged longterm secular growth drivers and high margins to absorb cost inflation, US Pharma’s one-year forward P/E is significantly below other US defensive sectors despite having higher 2021-25E revenue growth.” Credit Suisse says U.S. pharma as a group is trading at a price-earning ratio of 16 times to 17 times while defensive sectors utilities and consumer staples have 18-20 P-E ratios, on average. The firm sees 20% upside on Merck from here, saying the stock has “low-risk and high short-term growth,” which is “important in today’s macro environment.” For AbbVie, it sees 11% upside from here, noting it has the “highest dividend yield among peers.” The stock currently yields 3.89%. The report cites data showing U.S. pharma beating the S & P 500 during major recessions and notes that the sector is performing well this year. The VanEck Pharmaceutical ETF is down just 4.7% on the year, compared to a 17% loss for the S & P 500 so far in 2022. Merck is up 33% this year and AbbVie is up 12% in 2022. “The earliest we see macro improvement is by the end of the year, but we could be well into 2023 before the macroeconomic trends settle out,” states the note. “As such, we believe large-cap biopharma should remain a solid outperformer in the coming months, with portfolios requiring diversity in the defensive names. If markets rally on further clarity, we see our higher-growth names, such as Eli Lilly, being insulated from the rotation away from defensives and back into growth names.” — With reporting by Michael Bloom
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