What to Expect From Big Pharma's Earnings

Damien Conover: As we approach the first-quarter earnings for the large-cap pharmaceutical stocks, there's a lot of important themes that we think investors should be aware of. One of the key themes will likely be commentary about drug rebating. Over the last couple months we've had congressional hearings about the potential to eliminate drug rebates. And this is really an effort to try to make drug pricing more transparent. And we expect commentary from a lot of the firms to explain what this potentially means for the outlook of sales growth. When we unpackage this outlook, we think it's going to be really beneficial, especially for firms that don't do a lot of drug rebating. Firms like Roche, Celgene, Bristol--we think these firms are well positioned in a rebate-free environment, but there are other firms that really lean into rebating. These are firms like AstraZeneca, Eli Lilly--it could be more of a challenge for them, but in the whole scope of things, we think more transparency should largely be good for the large-cap drug firms.

Another key theme we're looking at in the first-quarter results is how the next-generation drugs are doing and, really, the ability for these next-generation drugs to offset drugs facing generic and biosimilar competition. Johnson & Johnson is, I think, a good example of what we're looking for in this example. They have a key molecule called Remicade that is facing biosimilar competition, and we're anticipating this drug to lose about 20% of sales annually over the next several years. However, Johnson & Johnson also has a lot of great new molecules that are gaining increased traction. So when we look at J&J overall, we think the firm is well positioned for steady growth; however, on an evaluation perspective, this is a firm that we think is largely fairly valued, nevertheless has a strong, wide economic moat that we think will protect its profits over a long term.

Shifting gears to a few other firms that we think are undervalued and we anticipate this quarter's earnings results to help guide us to more granularity on some of the valuations--Bayer is a name that we think is undervalued. We anticipate this quarter's results to really show fundamental growth within its core business and to talk a little bit more about the litigation around the glyphosphate concerns, which we think has caused an undue amount of pressure on this specific stock. The last name I'd mention here is AbbVie. This is a firm also facing biosimilar competition against Humira--one of its key molecules. However, it's got a lot of great next-generation molecules in oncology, immunology, that we think will support long-term growth.

In aggregate, when we're looking at the quarter, we think large pharmaceutical stocks will report solid earnings that really should help give us more granularity around the drug rebates that potentially could be eliminated, as well as more granularity around some of the new drug launches offsetting products losing exclusivity to generics and biosimilar competition.