| NEW YORK
NEW YORK Jan 12 Investors in large U.S.
pharmaceutical and biotech companies are counting on strong
dividends, reasonable stock valuations and new products to help
ride out a storm of political uncertainty as the incoming Trump
administration dives into healthcare policy.
The sector took a pounding on Wednesday after U.S.
president-elect Donald Trump said the drug industry was "getting
away with murder" on medicine costs, suggesting that the specter
of government actions on pricing is not going away any time
soon. The industry faced critical scrutiny during much of the
presidential election campaign last year.
But despite the potential for political volatility ahead,
some investors are finding reasons to hang onto shares of
"We do think they are generating a lot of cash, throwing out
a very nice dividend and the valuations are more reasonable than
many areas of the market," said David Katz, chief investment
officer at Matrix Asset Advisors in New York, which owns stock
in Merck, Pfizer, AbbVie and Gilead
"We definitely are worried and aware" of pricing concerns,
Katz said. "But we think when all is said and done they are
going to muddle through it - and the stocks are too cheap."
While the S&P 500 companies are overall trading at prices
well above their traditional valuations, a group of
pharmaceutical stocks in the index recently has
traded at 14.8 times earnings estimates for the next 12 months,
below their 16.4 average over the past three years, according to
Thomson Reuters Datastream.
Shares of Gilead, which also faces questions about its
hepatitis C franchise sales, are trading at around 7 times
forward earnings, while fellow biotech giant Amgen is
trading at 12.5 times.
Merck, whose shares have climbed in the past two days after
positive developments for its cancer treatment Keytruda, holds a
higher P/E ratio of 16.3 times. But even that is lower than the
17 times for the S&P 500 as a whole.
Large drugmakers and a few biotech companies also offer
solid dividend payouts. The group of S&P 500 drugmakers are
yielding 2.85 percent, which is above the S&P 500's yield of 2.4
percent and slightly ahead of the 2.83 percent for the S&P 500
consumer staples index, which includes companies known
for their high dividends.
Drugmakers "have long track records of paying those
dividends and regularly increasing them," said George
Strietmann, portfolio manager with Cincinnati investment
advisory firm Bahl & Gaynor. "The market looks at that as a very
strong part of the foundation of owning the stocks."
Bahl & Gaynor owns shares of AbbVie, which has a dividend
yield of 4.2 percent, and Merck, which is yielding 3.1 percent.
Smaller biotech and pharma companies do not offer such
dividends, leaving them with potentially less cushion than their
larger peers should drug-pricing pressures increase.
Regardless, Peter Jankovskis, co-chief investment officer at
OakBrook Investments in Lisle, Illinois, said he is "very
optimistic" about pharma and biotech, noting that "many of them
are extremely beaten down."
"We think it's a great sector to be in," Jankovskis said,
"and whether we get the benefit of it in the next few months or
over the next couple of years, either way we think we're going
to come out ahead."
Some investors remain concerned about the sector. Investors
should be wary about companies that derive a lot of revenue from
big government health programs such as Medicare and Medicaid,
said Kim Forrest, senior equity research analyst at Fort Pitt
Capital Group in Pittsburgh.
"We think that investors should really pay attention to
where the money comes from in these companies, who the buyer
is," Forrest said.
(Reporting by Lewis Krauskopf; Editing by Rodrigo Campos and