How Healthy Are Pharma Stock Valuations?

A handful of healthcare names are selling at premiums now, but buying opportunities are surfacing, as well

Damien Conover 14 April, 2014 | 1:45PM
Facebook Twitter LinkedIn

The Morningstar Minute is our quick take on investments, the market, economic indicators, and more.

Damien Conover: Today we're talking about healthcare, and when we think about health care, there are a lot of different industries within healthcare. But when we aggregate our fair value estimates across the different industries, everything in healthcare is looking pretty fairly valued. Now that being said, within each one of the industries, we see some stocks that are definitely undervalued and certain stocks that are overvalued.

Taking a look at the Big Pharma space, this is a space where the dividends we think are very secure, so if you are looking for income it’s a great place to be, but from a valuation perspective a couple names we're concerned about are AstraZeneca (AZN) and Bayer (BAYN). And then when we flip to the other side, names we think are undervalued, really Sanofi (SAN) comes to the top of the list there.

Shifting gears then into biotechnology, it's the same sort of thing here. In the undervalued camp, we really like Gilead (GILD) right now. It has had a nice pullback as most of the biotechs have pulled back recently, and we think that offers investors a good upside, especially on the basis of their new hepatitis C product. Biogen Idec (BIIB) to us looks like it's got overvalued, and it's a name that we're concerned about. While it has great new products, we think that's more than baked into the valuation right now.

On the device side, it's the same sort of story here. A name that we really like is Cooper Companies (COO). The firm is introducing a new product into the contact lens manufacturing space; there's a lot of upside there. Conversely a name that we think is overvalued as Boston Scientific (BSX), kind of a laggard in bringing new products into the market.

Shifting gears into the services space, a lot of our best ideas are here in the pharmacy benefit management space. This is a group that does the negotiations for drug prices. Express Scripts (ESRX) and Catamaran (CTRX) looked very well-positioned for upside on the valuation. Conversely, hospitals right now look like they have got a little bit ahead of themselves, and the valuations look a little rich to us.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn

About Author

Damien Conover  is a guest author