Biotechnology stocks have suffered this year amid concern about government moves to restrain drug prices and scrutinize acquisitions. Also concerning investors are the prospects of drug-patent losses.
The S&P 500 Biotechnology Index has slid 12% year to date, compared with the 13% gain for the overall S&P 500.
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But hope isn’t lost, says Morningstar analyst Karen Andersen. “We think the biopharma-related policies in the Inflation Reduction Act [price limits] are manageable, and that innovation will offset the patent losses,” she wrote.
She forecasts five-year compounded annual revenue growth of 3.3% for the industry and 4.5% when excluding covid products.
“The industry is still outrunning patent losses, with innovation, particularly after factoring in covid headwinds,” she said. By covid headwinds, she means the drop in demand for covid-related pharmaceuticals as the pandemic dissipates.
“The biopharma group looks undervalued,” Andersen said. “We expect double the amount of sales from newer products ($238 billion) versus sales lost to patent expirations ($115 billion) over the next five years.”
Here are Morningstar’s top five stock picks in the sector. All have Morningstar wide-moat ratings. That means the firm sees durable competitive advantages for the companies that will last at least 20 years.
Bayer
(BAYRY) -)
Morningstar fair value estimate: $22.50. Monday price quote: $12.30.
“The recently lowered 2023 guidance is disappointing,” wrote Morningstar analyst Damien Conover.
But “we … are increasingly optimistic that new [Chief Executive] Bill Anderson will increase the speed of development and execution that Bayer needs to accelerate innovation, especially in the drug business.”
Gilead Sciences
(GILD) -)
Morningstar fair value estimate: $97. Monday price quote: $74.70.
“Gilead generates stellar profit margins with its HIV and hepatitis C virus portfolio, which requires only a small sales force and inexpensive manufacturing.” Andersen wrote.
“But Gilead needs HCV market stabilization, strong continued innovation in HIV, solid pipeline data, and smart future acquisitions to return to growth.”
GSK
(GSK) -)
Morningstar fair value estimate: $54. Monday price quote: $37.55
“GSK has used its vast resources to create the next generation of health-care treatments,” Conover wrote.
“The company's innovative new product lineup and expansive list of patent-protected drugs create a wide moat. ... Its product portfolio spans several therapeutic classes.”
Pfizer
(PFE) -)
Morningstar fair value estimate: $48. Monday price quote: $32.75.
“Pfizer's foundation remains solid, based on strong cash flows generated from a basket of diverse drugs,” Conover said.
“The company's large size confers significant competitive advantages in developing new drugs. … And Pfizer's vast financial resources support a leading sales force.”
Roche
(RHHBY) -)
Morningstar fair value estimate: $56. Monday price quote: $34.15.
“As the market leader in biotech and diagnostics, this Swiss giant is in a unique position to guide global health care into a safer, more personalized, and more cost-effective endeavor,” Andersen wrote.
“Roche's biologics focus and innovative pipeline are key to the firm's ability … to continue growth.”
The author of this story owns shares of Pfizer.
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