Market Outlook: Healthcare Stocks

Concerns about pricing power for drugs is partially abating, meaning healthcare stocks have rallied over the past three months

Damien Conover, CFA 13 April, 2017 | 9:50AM

As concerns surrounding pricing power for drugs is partially abating, market valuations in healthcare have increased over the past quarter, with drug companies rallying. The recent aggregate healthcare price to fair value of 0.98 is up from 0.87 last quarter, but Morningstar equity analysts still see a few undervalued stocks, including Express Scripts (ESRX), Roche (RO), and Allergan (AGN).

We continue to expect near-monopolistic drug pricing as a result of patent protection that supports the core of our moat ratings for the large drug and biotech companies.

While drug prices will likely continue to soften in therapeutic areas with less innovation such as respiratory and diabetes, the innovative therapeutic areas of cancer, immunology, multiple sclerosis, and vaccines are poised for strong pricing power as the innovation is powerful enough to provide the drug companies better leverage in negotiations with the payer groups.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Johnson & Johnson137.19 USD-0.85
Roche Holding AG295.80 CHF0.14

About Author

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

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