Improving Long-Term Outlook for Big Pharma in 2013

As the patent cliff subsides, Big Pharma firms are launching the next generation of drugs, setting up both improving growth and expanding valuations

Damien Conover, CFA 22 January, 2013 | 2:28PM
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As Big Pharma firms begin to report fourth-quarter results, we believe the group is facing an inflection point towards improving long-term growth rates. We project the five-year compound annual growth rate in earnings will improve from negative 0.3% in 2012 to 1.7% in 2013 based on less patent exposure, improving pipelines, growing contributions from fast-growing emerging markets and cost-cutting. As the growth prospects improve, we expect the valuation of the industry will improve as well.

Key Takeaways

  • We project close to 100-basis-point improvement annually in our five-year CAGR for earnings beginning in 2013 and continuing through 2015.
  • Patent losses peaked in 2012 and are beginning to dissipate, removing the major growth obstacle for the Big Pharma group.
  • Pipelines continue to focus more on innovation in areas of unmet need, creating a stronger platform of the next generation drugs.
  • Despite lower margins, emerging markets will still contribute to growth for the industry. Also, while less room exists for cost cuts, further efficiency improvement will help buoy the industry's bottom line.
  • Our top three undervalued Big Pharma stocks are AbbVie (ABBV) (fair value estimate: $38), Johnson & Johnson (JNJ) (fair value estimate: $77), and Novartis (NOVN) (fair value estimate: 66 CHF).

Big Pharma's Long-Term Growth Rates Are Improving

With the patent losses subsiding and new product launches in 2013 combined with the likely strong Phase III data flow in 2013, we expect the long-term growth rate for the Big Pharma firms will improve over the next three years. Our five-year compound annual EPS growth rate improves from 0% in 2012 to 3% in 2015 as shown in the table below. As the growth prospects improve, we expect the group's valuation will increase.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
AbbVie Inc109.33 USD0.39Rating
AstraZeneca PLC8,795.00 GBX-0.22Rating
Eli Lilly and Co237.88 USD0.50Rating
GlaxoSmithKline PLC1,399.60 GBX-0.16Rating
Johnson & Johnson161.30 USD0.74Rating
Novartis AG76.93 CHF0.61Rating
Pfizer Inc41.49 USD-0.43Rating
Sanofi SA84.08 EUR0.00

About Author

Damien Conover, CFA  is an equity analyst and associate director at Morningstar.