Pfizer, Merck shares smoking hot in 2018 despite doldrums for overall biopharma sector

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An uncertain political outlook and mounting generic competition are among the risks threatening the valuations of biopharma companies in 2019, analysts say. (Ahmad Ardity)

By the end of the last full week of 2018, the two best performers on the Dow Jones Industrial Average for the year were Pfizer and Merck & Co., up 22% and 38% respectively. The two pharma bigwigs outpaced such stalwarts as Apple (down 8%) and Coca-Cola (up 7%), which could very well lead some investors to assume life sciences will be a safe place to park their money in 2019.

Not so fast, some experts say. Despite strong performance from many biopharma companies last year—not to mention record new drug approvals from the FDA—the sector as a whole faces a raft of challenges that could weigh on shares for some time. Witness the continuing debate over drug prices and the newly Democratic House of Representatives' focus on pharma price hikes, for example.

In fact, a quick look at some biopharma-focused indices reveals a more nuanced picture of stock performance in 2018. The Nasdaq Biotechnology Index did well at first but ended up down 9% for the year. And the S&P Pharmaceuticals Select Industry Index dropped more than 15% in 2018. That S&P index includes Pfizer, Merck and another top performer, Eli Lilly—which saw its share price jump 38% from the start of the year—but it also includes Johnson & Johnson, which fell 7% as it grappled with problems ranging from ongoing baby powder liability litigation to mounting generic competition for some of its best-selling drugs.

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So what fueled the sector’s top performers in 2018? Pfizer, for one, weathered President Donald Trump’s criticism of its price hikes and scored some much-needed FDA approvals, particularly in oncology. The company won four FDA approvals in a row, starting in late September with the EGFR-targeted lung cancer drug Vizimpro. It also snagged approvals for new drugs to treat breast cancer, ALK-mutated lung cancer and acute myeloid leukemia. The FDA nods went a long way toward calming investors’ fears about generic competition to Pfizer’s $3 billion-plus pain medication, Lyrica.

RELATED: The top 15 drug patent expirations of 2018 - Lyrica

Merck also turned in more than a few key oncology wins in 2018. At the start of the year, investors were fretting that the company’s immuno-oncology blockbuster Keytruda wouldn’t be able to withstand competition in first-line lung cancer. Then, in January, Merck released data from a key study showing Keytruda combined with Eli Lilly’s Alimta held off cancer growth and helped those patients live longer. As rivals faltered during the year, Keytruda continued to grow, leading analysts at Evaluate to declare that the drug would enter 2019 “even more entrenched than before.”

But even as companies like Merck and Pfizer were topping the Dow, reminders of the risks they and other biopharma players face this year emerged. In mid-December, Sen. Tammy Baldwin, D-Wisconsin, blasted Pfizer for planning to increase prices on 41 drugs this month. Baldwin sent a letter to outgoing CEO Ian Read demanding he justify the price hikes with specific data on marketing and manufacturing costs.

The uncertain political landscape has some investors wondering whether R&D wins will be enough to fuel further gains among drug companies that performed well in 2018. “I don’t think they’ll be bad stocks, I just don’t think they’ll be the high-fliers that they’ve been,” Loncar Investments chief Brad Loncar told Bloomberg.

RELATED: After New Year's, expect more drug pricing fireworks in 2019

That said, smart investors could find plenty of opportunities among biopharma companies now flying under the radar, suggested Evercore ISI analyst Umer Raffat in a brief email dispatched Dec. 27. He analyzed the average price/earnings ratios of more than 22 biopharma stocks, looking ahead to estimated earnings for the next 12 months, and discovered a “trough” that’s similar to share-price declines seen in the spring of 2009 and the summer of 2011. Those troughs, particularly the one in 2011, were followed by huge gains in that basket of stocks.

“I am no economist or portfolio strategist, but I do find it hard to ignore this,” Raffat said. He stopped short of predicting which biopharma companies might see their valuations soar in 2019, however.

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