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By Damien Conover, CFA | 11-28-2016 01:00 PM

2 Inexpensive, Innovative Pharma Stocks

Recent setbacks don't dent our conviction that Eli Lilly and Bristol-Myers' innovation is underappreciated by the market.

Damien Conover: In today's environment, when looking at drug companies, it's becoming increasingly important to have innovation, because we're seeing a lot of pushback on prices for drugs. And as we look at the large-cap pharmaceutical stocks, there's a lot of companies out there developing next-generation products that are major advancements over older drugs. And when we see this innovation, we think it's underappreciated when we look at the stock prices. In aggregate, most of the large-cap pharmaceutical stocks are trading below our fair value.

A couple of names that we'd point to, first off, is Eli Lilly. This is a firm that just recently had a setback on an Alzheimer's drug, but nevertheless, has a very strong pipeline of recently launched products and products that we think will reach the market over the next two years. I'd most importantly point out their immunology position, very strong position in psoriasis and rheumatoid arthritis, drugs that can really change the paradigm there. We think the growth rate for Eli Lilly is underappreciated, and we think the stock is undervalued.

One of the other names we'd point to is Bristol-Myers. Bristol-Myers also had a setback with one of its key drugs, Opdivo, but nevertheless, Opdivo has done very well in many other indications and will have a first-mover advantage in many difficult-to-treat cancers. We think this company is also underappreciated in its growth outlook, and we think the stock is trading at a discount.

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