Pharmaceutical services stocks may rally 30 percent over the next year as investors anticipate a surge in generic drugs coming to market, according to UBS Securities LLC.
Pharmacy-benefit managers surged through the first quarter of 2010, outperforming theStandard & Poor’s 500, on the belief that 2010-2012 would be a strong period for earnings related to the generic pipeline, Steven Valiquette, an analyst at UBS in Stamford, Connecticut, wrote in a report today. He said cheaper shares and earnings forecasts from the companies are likely to trigger a similar rally on prospects of earnings growth into 2012, propelled by generic drug sales.
Pharmacy-benefit managers including CVS Caremark Corp., Medco Health Solutions Inc. andExpress Scripts Inc. are likely to have the highest per-share earnings growth, generating 16 percent to 17 percent annually over the next five years, Valiquette said. The pharmaceutical services group includes pharmacy-benefit managers, drug distributors and long-term care pharmacies, all of which have underperformed through most of 2010 due to concern over earnings, he said.
“This creates a nice opportunity for investors to buy into the leaders at an extremely attractive entry point, as the pharmacy-benefit managers are the linchpin to the expected broad pharmaceutical services rally,” Valiquette wrote.
The Standard and Poor’s 500 Health Care Services Index has fallen 12 percent from an April 20 high. The rally fizzled because the generic pipeline was “not as strong as originally thought because the profit opportunity was ultimately back-end loaded to generic Lipitor in November 2011,” Valiquette wrote. Pfizer Inc.’s Lipitor cholesterol lowering treatment is the world’s best selling drug, with $11.4 billion in sales last year.
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