Deutsche Bank Sees A Brighter Future for Drug Stocks (MRK, PFE)

Deutsche Bank analysts sounded a positive note on U.S. pharmaceuticals recently, despite their valuations being back at their historical lows during the 1993-1994 Clinton health care debate. They state that patent cliffs, declining R&D productivity, a weak euro and weak EuroZone economies pose severe risks to the industry -- risks their discounted cash flows already have priced in. The DCFs of this group of stocks "already imply cuts of 5-10%, above budgeted cuts, the weak Euro, flat margins and no new drugs." Although "secular issues continue to plague the drug industry, namely punishing generic competition, declining R&D productivity, and global pricing pressures, EPS are nonetheless growing, due in large part due to substantial cost-cutting. The analysts believe the "derisking" of the financial markets may steer some capital towards U.S. pharmaceuticals "as they should deliver EPS growth, have high dividend yields, and low valuations, complemented by strong balance sheets, and cash flows. Companies like Merck

and Pfizer

have been aggressively restructuring, cost-cutting and acquiring other firms to to maintain growth margins. Although they see the risk that investors could shun the group in favor of better investments, they believe "the group could trade up 5-10% versus the market."