This week, HSBC adjusted its ratings on several leading biotechnology firms, attributing the changes to broader economic challenges, potential tariff implications, and evolving regulatory landscapes. Notably, Eli Lilly (NYSE:LLY) was downgraded from Buy to Downgrade. HSBC expressed concerns about the risk-return profile for Eli Lilly, particularly due to uncertainties surrounding the future growth trajectory of its obesity drug portfolio. The bank stated, “We are not confident that prescription momentum will continue for Lilly as market dynamics shift.”
Broader Sector Challenges
HSBC’s revised outlook was also influenced by wider sector concerns. Analysts highlighted, “The combined pressures of potential new tariffs, significant patent expirations, and challenges related to Part D and the Inflation Reduction Act in the U.S. could adversely affect earnings this time.” Their proprietary analysis suggests that innovative pharmaceutical companies could experience earnings declines between 6% and 14% if a 25% U.S. tariff is imposed.
The bank also pointed out risks associated with changes to Medicare’s Part D program. HSBC warned, “The Part D earnings risk looming in the latter half of 2025 is not yet fully understood. Manufacturers lack precedent in sharing cost burdens during the catastrophic phase.”
Cautious Approach Despite Attractive Valuations
While acknowledging that current sector valuations, adjusted for growth, are nearing recessionary levels, HSBC remains cautious. The firm emphasized the importance of rigorous forensic accounting checks to closely monitor the evolving situation.
Aside from Eli Lilly, HSBC has also downgraded Roche and Biogen (NASDAQ:BIIB) to Hold, while maintaining its Downgrade rating on GSK and Novartis (SIX:NOVN). In contrast, the bank expressed a preference for growth stocks with Buy ratings such as Novo, Astra, and UCB, as well as for GARP (Growth at a Reasonable Price) ideas like Abbvie and Sanofi (NASDAQ:SNY), and defensive stocks such as J&J (NYSE:JNJ).
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