Pharmaceutical Stocks Face 59% to 90% Price Drop, Goldman Sachs Warns
2min read Goldman Sachs has drawn a stark comparison between the current state of pharmaceutical stocks and the energy sector during the peak of the ESG (Environmental, Social, and Governance) era, suggesting that the pharmaceutical sector is facing significant market rejection. According to Seth James, a European pharmaceutical expert at Goldman Sachs, the trading performance of pharmaceutical stocks is akin to that of energy stocks during the height of the ESG movement, as if they are on the verge of extinction.
The relative price-to-earnings ratio of the pharmaceutical sector has declined to levels not seen since the recovery period following the global financial crisis and the COVID-19 pandemic. This decline indicates a shift in investor sentiment, with many now viewing pharmaceutical stocks as less attractive compared to other sectors. The comparison to energy stocks during the ESG peak highlights the challenges faced by the pharmaceutical industry, which has traditionally been a stable and defensive sector.
James noted that the current trading discount for the pharmaceutical sector is even greater than during any previous period of policy uncertainty. This sentiment was further exacerbated by the signing of an executive order by the U.S. President, which aims to align U.S. domestic drug prices with the lowest prices in other countries. This move is expected to reduce U.S. prescription drug and medication prices by 59% to 90%, adding to the selling pressure on the pharmaceutical sector and making an already difficult year even more challenging for pharmaceutical stocks.
Despite the bleak outlook, James suggests that the current environment may present a buying opportunity. With many pharmaceutical stocks nearing the bottom of their trading range, now could be the time to "grit your teeth and add to your net long positions in pharmaceuticals." Goldman Sachs data indicates that the long-short ratio for the European pharmaceutical sector is near a five-year low, while the U.S. market is even more extreme on the short side. Such extreme positioning typically sets the stage for a rebound.
However, multiple policy uncertainties continue to loom over the pharmaceutical sector. In addition to potential tariff policies and the U.S. President's plan to align high-priced prescription drugs with lower prices, the latest guidance draft from the U.S. Centers for Medicare and Medicaid Services (CMS) has raised concerns. The draft includes new sections on fixed combinations, which could lead to certain subcutaneous injection formulations being included in IRA price negotiations earlier than expected.
Asad Haider, a Goldman Sachs analyst, points out that while these factors could eventually be part of a "grand compromise," they currently cast a shadow over the entire industry. The pharmaceutical sector faces a complex landscape of opportunities and risks, with potential for both significant gains and substantial losses. Investors must navigate this environment with caution, considering the unique challenges and opportunities presented by the current market conditions.
