Morgan Stanley cuts specialty pharma
Yet for the specialty pharmaceuticals group, which includes companies such as Allergan (AGN: news, chart, profile), King Pharmaceuticals (KG: news, chart, profile), Forest Labs (FRX: news, chart, profile), Alpharma (ALO: news, chart, profile), and Cephalon (CEPH: news, chart, profile), Morgan Stanley's Marc Goodman thinks the risk/reward tradeoff at current levels is no longer as favorable as it was at the start of the year, even though he believes positive long-term trends for the group remain in place.
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Morgan Stanley, meanwhile, moved its recommendation on the specialty pharmaceutical, or small-to-mid-size pharmaceutical companies, to "in-line" from "attractive" in a call largely based on valuations.
The specialty pharma companies, analyst Marc Goodman said, have had strong performance year-to-date and trade at relatively high valuations when looking over the past eight quarters, especially the generic companies. Yet, although many traded at higher valuations in the 1999 to 2001 time period he said "it is clearly a different economic environment today" and therefore he does not believe those valuations are indicative of where the group can trade going forward.
Goodman still believes the long-term trends for the group are positive but in the interim, given current valuations, he said the facts that earnings forecasts are rising but at a decelerating rate; that generic stocks already reflect product expectations; and that competition for product acquisitions and in-licensing opportunities has increased make a neutral stance on the sector more appropriate.
Goodman's favorite names in the group are Allergan and Forest, which he called "high quality situations with positive fundamentals" as well as "beaten down names that investors currently disfavor" like King.
Susan Lerner is a reporter for CBS.MarketWatch.com.
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