Independent investment research firm Morningstar has published its latest Healthcare Observer, “Strong Pipelines Support Big Biotech and Big Pharma Moats and Attractive Valuations.”
In the report, Morningstar equity analysts rank the large-cap drug companies on three core metrics by 2020: new drug sales, sales lost to generic competition, and sales from older products not facing generic competition. The report also dives into a summary of the economic moats, or sustainable competitive advantages, of Big Pharma and Biotech stocks, including intangible assets in the form of patents, diversification, and pipeline productivity.
Key highlights of the Healthcare Observer include:
- Based on the pipeline, patent loss, and in-line product analysis, the most undervalued firms with strong rankings and underappreciated growth include BioMarin(Nasdaq: BMRN) because of strong in-line and pipeline scores, Bristol-MyersSquibb (NYSE: BMY) because of its strong in-line score, Eli Lilly (NYSE: LLY) because of its strong pipeline score, and Roche (ROG: SIX), which excels in both in-line and pipeline scores.
- BioMarin, Regeneron (Nasdaq: REGN) and Celgene (Nasdaq: REGN) dominated the rankings this year, as they are poised to see the strongest growth over the next five years. These firms are working from more concentrated portfolios and smaller revenue bases than their Big Pharma peers, but strong pipelines at BioMarin and Regeneron and continued double-digit growth potential for Celgene’s Revlimid (lenalidomide) support their rankings.
- US patents extend 20 years from the filing date, allowing firms to charge monopolistic prices once a drug is approved. Therefore, patent strength and duration is a key component of the Morningstar Economic Moat Rating for branded drug firms. Once patents expire, sales can fall by 70 or more within a year of a generic’s launch.
- While the strength of a portfolio can be partly measured by revenue, the breadth of a firm’s portfolio can be an indicator of the firm’s research and development productivity or business development success, and provides a buffer against increased competitive threats to a single product in the firm’s portfolio.AbbVie (NYSE: ABBV), Celgene, and Regeneron see more than half of their sales from a single drug, a significant factor in their narrow moat ratings despite excess economic returns.
- While pipeline productivity is a main factor in determining a firm’s moat, pricing pressure also plays a part. In the case of biotech and pharma, the overall industry is facing a slight headwind to moat trends because of declining pricing power. Most of the top 20 drug firms Morningstar covers are focused on specialty markets and areas of unmet medical need, such as oncology and rare genetic diseases, making them attractive across the industry.