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Despite the extraordinary performance of a few biotech standouts, healthcare stocks have generally languished over the past 12 months as the Covid-19 pandemic has injected extra costs and uncertainty into the sector.
The S&P 500 Healthcare Sector index is up 22.1% over the past 12 months, trailing behind the S&P 500, which is up 43.9%. The
index (ticker: DRG), for its part, is up only 9.7%.
As Barron’s has argued in recent weeks, there is value to be found in healthcare, particularly among the pharma giants. To find the bargains, we screened the S&P 500 for the healthcare companies that trade the furthest below the mean of analysts’ targets for their stock prices, based on data from FactSet, the financial information service.
What we found solidified our view that while there is value to be found in healthcare generally, biopharma is the sweet spot.
We ran a similar screen a month ago, with one key difference. Instead of searching through all healthcare firms in the
for those trading furthest below their average price targets, as we did in our most recent screen, we only looked at the biopharma firms in the S&P 500 that were trading farthest below their average price targets.
The results of the two screens were virtually the same. The stocks that looked the best among biopharma companies turned out to be the most promising even when we looked at the broader healthcare industry.
The cheapest relative to their average price targets were
(ticker: VTRS),
(VRTX),
(REGN),
(INCY), and
(CTLT). Last month’s search of biopharma names produced the same list, although instead of Catalent, we landed Merck (MRK).
The stocks that cleared the screen are widely covered, so that the mean price targets calculated by FactSet are based on the views of more than 20 analysts, in some cases.
Source: FactSet
The healthcare stock in the S&P 500 that is trading the furthest below its average target price is Viatris, the firm formed last year by a merger between the generic drug manufacturer Mylan and a spinoff from
The stock, which has fallen 30% so far this year, has an average target price of $18.79, 43.1% above its recent level.
Viatris faces serious skepticism from a large number of analysts. But the notably large gap between the stock’s price and analysts’ targets may be due, at least in part, to inattention. Only two of the price targets have been updated so far this month, during which time the stock has fallen 7.5%.
Next on our list is Vertex, which has an average price target 28.8% above its recent level. Long an investors’ darling, Vertex fell out of favor last October, when disappointing trial results for a key drug in its pipeline led the company to drop the program. Yet as Barron’s wrote in early March, the pullback since then has been overdone, leaving an opportunity for investors to get into the stock. Shares are down 16.2% over the past 12 months.
Key data on a Phase 2 trial of a drug targeting alpha-1 antitrypsin deficiency is due in the second quarter of this year. And the company’s core cystic fibrosis franchise remains strong.
On Tuesday, Vertex said it would pay $900 million up front, and another $200 million upon regulatory approval, for an additional 10% of the profits on sales of an experimental gene-editing therapy it is developing with CRISPR Therapeutics.
Regeneron, which has an average price target that is 25.9% above the recent price, has climbed 4.4% so far this year. Investors have been wary about the competitive pressures on the company’s top-selling drug, Eylea, a treatment for wet age-related macular degeneration. But analysts are focused on the promise of Dupixent, an antibody therapy Regeneron is marketing in collaboration with
(SNY).
Incyte ’s
average target price is 25.3% higher than its recent share price. Incyte’s patent protections on Jakafi, the rare-disease drug that accounts for the vast majority of its revenues, expire in 2027, which may be scaring off investors. Still, the company has a large pipeline. Half of the 20 analysts who cover it tracked by FactSet have Overweight or Buy ratings.
Rounding out the list is Catalent, which provides contract manufacturing to drugmakers, among other services. Catalent has drawn attention this year for providing vial filling capacity to some of the Covid-19 vaccine makers. The stock’s average target price is 23.1% above its recent level. Catalent shares are up 5.1% so far this year.
Covid-19 demand has driven substantial growth in some parts of Catalent’s business, and some investors may worry if that growth is sustainable. Analysts think it is: All but two who cover the stock and are tracked by FactSet rate it at Buy or Overweight.
Write to Josh Nathan-Kazis at josh.nathan-kazis@barrons.com
