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Quarter-End Insights

Healthcare: Values Among Drug, Biotech, and Supply Chain Firms

Innovation, consolidation, and a mixed regulatory picture for healthcare stocks in the first- quarter.

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  • In aggregate, valuations in the healthcare sector have slightly decreased to a price/fair value of 1.01, down from 1.04 at the start of the year, but the differences in industry valuations suggest drug, biotech, and drug supply chain industries are the most undervalued areas. Within these industries, our top picks are  Allergan (AGN),  Roche (RHHBY),  McKesson (MCK,) and  Shire (SHPG).
  • In the United States, the passage of tax reform is significantly reducing tax burdens and should boost cash flows over the long term. However, other newly passed U.S. regulations have caused drug pricing concerns in the most profitable region of the world, but we still expect strong drug pricing power in the U.S.
  • The healthcare consolidation trend continues, with several companies looking to increase scale for competitive positioning as new threats emerge and cost pressures continue.
  • In the Big Pharma and Big Biotech industries, innovation continues and supports strong pricing power despite the increased pricing pressures from governments and pharmacy benefit managers.

Regulatory changes in the U.S. have provided a mixed picture for healthcare, with the positive benefits of tax reform offsetting the minor negative legislation on drug pricing. With the U.S. corporate tax rate falling to 21% from 35%, many global companies' tax rates have fallen by several hundred basis points. However, changes to payments to some of the U.S. drug programs, including Medicare Part D, will create a minor headwind to prices in the U.S., but pricing should remain strong relative to other geographies.

Damien Conover does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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