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Stocks  | December 18, 2018

After a seemingly promising start to the second half of the year, the markets have once again signaled volatility. For instance, the Dow Jones Industrial Average dropped a worrying 2% to end the prior week. Typically, though, pharmaceutical stocks offer longer-term protection.

The thesis is fairly straightforward. Pharmaceutical firms provide an indispensable service. Moreover, the baby boomer generation is currently both the biggest generation, as well as one of the oldest. While millennials will soon overtake them in sheer number, boomers require extensive medical care. Theoretically, this trend should boost Big Pharma stocks.

However, we’re seeing the exact opposite this year. The sector benchmark SPDR S&P Pharmaceuticals (NYSEARCA:XPH) is down 8% year-to-date. Even more disturbing, the XPH fund shed 20% since the end of August. If pharmaceutical stocks represent viability, they’re doing a bad job of it.

But why is the industry underperforming? According to The Wall Street Journal, Big Pharma stocks have fundamentally victimized themselves. As biotechnology improved, so have individual therapies’ efficacy. That leaves fewer diseases for competitors to address.

We saw this phenomenon with Gilead Sciences (NASDAQ:GILD). Gilead introduced a Hepatitis C drug that eradicated the disease, not simply manage it. But to make the drug profitable required the company to raise prices, causing a political and PR firestorm.

This leads to another point: pharmaceutical stocks will likely be judged by their underlying organization’s substantive efficacy. Now that Gilead has made a breakthrough, investors will expect similar results elsewhere.

Plus, with the shaky political environment, Big Pharma stocks have lost their luster. The following are seven pharmaceutical stocks you should consider excising before the volatility worsens:

Amgen (AMGN)

It’s never easy to go bearish on an organization. However, among major pharmaceutical stocks, Amgen (NASDAQ:AMGN) seems a solid candidate for jettisoning.

Primarily, AMGN stock is up double-digits for the year. This runs counter to the benchmark XPH, which is down nearly double digits. Eventually, you’d expect the overall industry to weigh down its top players since Big Pharma stocks are most vulnerable to the industry’s declining opportunities.

It just comes down to simple science: big mouths have big appetites. For AMGN stock, I question whether its growth trajectory justifies its market value. Annual sales growth has steadily declined in recent years. In 2018, we’re on course for a 2% gain.

With both sector and broader market troubles ahead, I’d take profits on AMGN stock.

Eli Lilly (LLY)

On the surface, Eli Lilly (NYSE:LLY) doesn’t appear as an investment to sell. Compared to other Big Pharma stocks, including other industries, Eli Lilly is a conspicuous outperformer. On a YTD basis, LLY stock has gained nearly 36%. Along with that upside comes a 2% dividend yield.

But as with Amgen, I think it’s time to consider profiting from these anomalies. Pharmaceutical stocks took a big hit on Friday, along with the rest of the markets. LLY stock was no different. It absorbed a 2.6% hit, one of the company’s biggest losses in the second half of this year.

Recently, LLY stock trekked higher off positive analysts’ assessment of the underlying firm’s diabetes drug. However, you should know that diabetes is a competitive subsegment. More importantly, medical research indicates that no one drug is superior in managing this disease. Plus, cheaper drugs could be just as effective as the “big boy” brands.

Sanofi (SNY)

A similar story to the prior two Big Pharma stocks, Sanofi (NYSE:SNY) has significantly outperformed the sector. Since the January opener, SNY stock has gained nearly 6%. In the second half, shares have soared to double digits. The company also pays a very generous 4% dividend.

So what’s the problem? According to several mainstream sources, major pharmaceutical stocks are due for a significant correction. While that assessment doesn’t necessarily implicate SNY stock, it’s rare that an individual player consistently outperforms its industry. On Friday, shares dropped nearly 2%, perhaps indicating further troubles ahead.

If you’re already profitable with SNY stock, I think the reasonable approach is to trim your exposure. While it does pay a handsome dividend, and dividend payers tend to do well in a bear market, pharmaceutical stocks are simply volatile.

If the WSJ has urged caution, that’s a good sign to listen.

Regeneron Pharmaceuticals (REGN)

Despite its recent surge higher, my opinion is that Regeneron Pharmaceuticals(NASDAQ:REGN) is also signaling worrying signs. While the company offers promising innovations, practical investors may want to lighten their exposure to REGN stock.

One obvious warning is that shares fell into the dumpster in late October. This extreme volatility tells us that the bears have ample reason to go negative on Regeneron. A solid earnings beat for its recent third quarter provided the contrarians some encouragement. However, REGN stock has failed to convincingly drive toward this year’s highs.

In addition, where Regeneron currently stands represents a long-term resistance level. Based on difficulties incurred among other pharmaceutical stocks, REGN faces an uphill challenge. On top of that, annual sales growth has slowed from double digits to high single digits.

That’s not the direction you want to go, so I’m cautious on REGN stock.

Allergan (AGN)

When taking a cursory look at the charts, Allergan (NYSE:AGN) immediately entices the contrarian investor. For starters, AGN stock has shed 8% YTD. Significantly, those losses came during the past two-and-a-half months. Since September-end, shares have plummeted nearly 22%. In that context, the company hasn’t gone anywhere over the past five years.

But if you’re thinking about speculating on AGN stock, I’d reconsider. Despite the steep losses, Allergan is not attractive from a dividend perspective, yielding just under 2%. More importantly, its revenue trajectory is woefully unattractive. In its last quarter, Allergan absorbed a 3% sales decline against the year-ago level.

The earnings picture is equally unattractive. For 2019, analysts anticipate earnings-per-share to come in at $16.43. This suggests that the markets aren’t expecting much from AGN stock. Judging from its revenue performance, I don’t disagree.

Bristol-Myers Squibb (BMY)

Everyone knows that pharmaceutical stocks are prone to sudden volatility. Even the big names can disappoint based on failed clinical trials. At the same time, proven competitors can often come back from the doldrums; hence, Bristol-Myers Squibb (NYSE:BMY) appeals to the discerning contrarian.

This is a difficult idea as I think BMY stock is a solid pick. On multiple levels, BMY has outpaced the competition. The company has maintained relatively strong revenue growth over recent quarters and years. It features an array of lucrative drug pipelines. In the worst-case scenario, Bristol-Myers levers a strong balance sheet.

But BMY stock is not immune to industry headwinds. In late November, shares declined when the pharmaceutical’s lung-cancer drug failed efficacy tests. Inherently, this means that BMY must spend more money into research and development. Its prior R&D expenditures have dropped net margins near corporate all-time lows.

Celgene (CELG)

Renowned Celgene (NASDAQ:CELG) has suffered one of the steepest declines among Big Pharma stocks, hemorrhaging more than 35% YTD. The last time CELG stock traded at its current sub-$70 level was spring of 2014. Naturally, speculators have circled Celgene like sharks smelling blood.

Like Bristol-Myers Squibb, Celgene is a tough investment to crack under this environment. Revenue performance has impressed, producing double-digit growth on both a quarterly and annual basis. Plus, its profitability metrics are among the best in the industry.

At the same time, Celgene spent significant funds toward R&D and business-related expenses. Such expenditures are now mandatory, which will pressure pharmaceutical stocks. I doubt that CELG stock will receive an exemption.

I’m also concerned that legal factors that are directly related to the pharma business could suddenly impact Celgene. Given that the sector faces a tough transition phase, I’d adopt a cautious approach to CELG stock.

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