By Elsa Ohlen

President Donald Trump's tariff policy is the latest blow to a pharmaceutical sector already facing mounting uncertainties, including how Robert F. Kennedy Jr., secretary of Health and Human Services, will change the U.S. healthcare system.

While pharmaceuticals have so far been spared from import taxes, Trump has vowed to impose a "major" tariff on the sector "very shortly." He has suggested levies might be as high as 200% -- part of his effort to bring manufacturing to the U.S.

While most analysts don't predict tariffs on pharmaceuticals to reach triple digits, they still prefer the stocks of companies that are less at risk of damage and have less exposure to the broader challenges the sector faces.

A 25% tariff could reduce earnings in the sector by about 15%, Jefferies analyst Akash Tewari noted last week, but mitigation efforts such as stockpiling, increasing drug prices or shifting manufacturing to the U.S. could reduce the damage to the mid single digits. Companies with the majority of their sales, manufacturing, and intellectual property in the U.S. may be the safest bet, he said.

Analysts at Cantor Fitzgerald led by Carter Gould said in a research note published late Monday that they lean toward companies with dominant franchises, fast top-line growth, and good prospects for sales and earnings into the 2030s, as well as relatively lower exposure to potential tariffs.

He favors Eli Lilly, AbbVie and Regeneron Pharmaceuticals among large-cap U.S. names, rating them at Overweight. He also rates Gilead Sciences, Vertex Pharmaceuticals, and Vaxcyte at Overweight.

Gould expects the largest drugmaker by market value, Eli Lilly, to further consolidate its leadership in obesity drugs. The maker of blockbuster drugs Zepbound and Mounjaro saw its shares soar last week after it released encouraging trial results for its new weight-loss pill Orforglipron. That could help it to grab even more market share from Novo Nordisk, the Danish company that has the only other medicine the Food and Drug Administration has approved for weight loss.

Gould said he likes AbbVie both for its growth prospects and because it is a defensive play, with a differentiated top line, citing continued momentum across its best-selling inflammation medicines Rinvoq and Skyrizi. Vertex and Gilead both have good risk profiles, Gould said, noting that Vertex says it has no manufacturing outside of the U.S.

Regeneron's and Vaxcyte's current valuations look attractive, Gould said. He has a price target on Regeneron of $695, implying an upside of 24% from Monday's closing price. He doesn't have a price target on Vaxcyte but says the stock price doesn't properly reflect opportunities around its adult vaccine program "despite pristine data."

The pharmaceutical sector has had some challenging years since the Covid-19 pandemic. Concerns over lagging growth, guidance misses and a few high-profile clinical trial setbacks -- and now, tariff threats -- have led large-cap pharma stocks to drop 4% so far this year, and 7% since the start of 2024.

"If there was hope for pharma [to] benefit from a tilt towards more defensive sectors on rising concerns over a recession--the opposite has occurred," Gould said. Large-cap biopharma has underperformed not only other defensive sectors like staples and utilities, but also the broader market in recent weeks.

Write to Elsa Ohlen at elsa.ohlen@barrons.com

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April 22, 2025 11:13 ET (15:13 GMT)

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