BCA Research advises investors to overweight their portfolios in the pharmaceutical sector, asserting that recent challenges are beginning to subside.
According to the firm's note, while COVID-related spending declines and stubborn pharma inflation have weighed on sales, the worst is now behind, and much of the bad news is already factored into current valuations.
In addition, the firm believes the aging baby boomer population and a slower decline in morbidity rates compared to mortality rates create structural tailwinds for the industry.
BCA Research highlights that a record number of blockbuster drugs, particularly those targeting cancers, obesity, and gene therapies, were introduced to the market in 2023, promising substantial revenue growth for pharmaceutical companies.
Generative AI is poised to revolutionize the sector by significantly shortening R&D cycles and saving billions in development costs, according to BCA. Although generics and biosimilars will continue to exert pressure on top-line growth, the importance of a robust R&D pipeline has led to a resurgence in M&A activity.
Politically, the landscape appears favorable. BCA Research notes, "Democrats are unlikely to gain single-party control, and as such will not be able to expand price caps," while Republicans are more inclined to cut discretionary social spending rather than healthcare spending.
With the industry trading at a discount to the broader market and currently oversold, BCA Research concludes that earnings growth is expected to rebound sharply, outpacing the market. They recommend an overweight position in Pharma, citing dissipating challenges and positive long-term trends like generative AI and an aging population.