Biotech stocks have suffered this year amid concerns about government moves to cap drug prices and scrutinize acquisitions. Investors are also concerned about the prospect of drug patent losses.
The S&P 500 biotechnology index has fallen 12% so far this year, compared with the broader S&P 500’s 13% gain.
Related: Best Healthcare ETFs to Buy Now
But hope is not lost, stocks/5-undervalued-biopharma-companies-our-5-year-forecast”>says Morningstar analyst Karen Andersen. “We believe the biopharma-related policies in the Inflation Reduction Act (price caps) are manageable and that innovation will offset patent losses,” she wrote.
She forecasts five-year compound annual revenue growth of 3.3% for the industry and 4.5% excluding Covid products.
“The industry is still overcoming patent losses through innovation, especially after accounting for Covid headwinds,” he said. By Covid headwinds, he means falling demand for Covid-related pharmaceuticals as the pandemic dissipates.
“The biopharmaceutical group seems undervalued,” Andersen said. “We expect to double the amount of sales of newer products ($238 billion) compared to sales lost due 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. This means that the company sees lasting competitive advantages for the companies that will last at least 20 years.
Bayer
(BAYRY) – Get a free report
Morningstar Fair Value Estimate: $22.50. Monday price quote: $12.30.
“The recently lowered guidance for 2023 is disappointing,” wrote Morningstar analyst Damien Conover.
But “we… are increasingly optimistic that new (CEO) Bill Anderson will increase the speed of development and execution that Bayer needs to accelerate innovation, especially in the drugs business.”
Gilead Sciences
(BROWN) – Get a free report
Morningstar Fair Value Estimate: $97. Monday Price Quote: $74.70.
“Gilead generates stellar profit margins with its HIV and hepatitis C virus portfolio, which only requires a small sales force and economical manufacturing.” Andersen wrote.
“But Gilead needs stabilization of the HCV market, continued strong innovation in HIV, solid data in development and smart future acquisitions to return to growth.”
GSK
(GSK) – Get a free report
Morningstar Fair Value Estimate: $54. Monday quote: $37.55
“GSK has used its vast resources to create the next generation of healthcare treatments,” Conover wrote.
“The company’s innovative line of new products and extensive list of patent-protected drugs create a wide moat. …Its product portfolio spans several therapeutic classes.”
Pfizer
(PFE) – Get a free report
Morningstar Fair Value Estimate: $48. Monday price quote: $32.75.
“Pfizer’s foundation remains strong, based on strong cash flows generated from a basket of diverse medicines,” Conover said.
“The large size of the company confers important competitive advantages in the development of new medicines. …And Pfizer’s vast financial resources support a leading sales force.”
Roche
(RHHBY) – Get a free report
Morningstar Fair Value Estimate: $56. Monday Price Quote: $34.15.
“As a market leader in biotechnology and diagnostics, this Swiss giant is uniquely positioned to guide global healthcare toward a safer, more personalized and more cost-effective endeavor,” Andersen wrote.
“Roche’s focus on biologics and its portfolio of innovative products are key to the company’s ability… to continue growth.”
The author of this story owns shares of Pfizer.
Enroll in Professional with real money to learn the ins and outs of the trading floor in Doug Kass’ Daily Diary.
