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Strong Moats for Undervalued Big Pharma Firms

A focus on unmet medical needs is helping pharma firms maintain their competitive advantage.

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In our analysis of the Big Pharma companies, we continue to see the industry as well positioned with strong economic moats. While our analysis reaffirms most of our moat ratings, we are increasing Bayer's moat to wide from narrow. Bayer's divestiture of its material science group combined with a strong drug business and a well-positioned crop science business (bolstered by the Monsanto acquisition) led us to upgrade its moat rating to wide.

Key to all the moats for Big Pharma companies is the increasing focus on innovation in areas of unmet medical need, enabling strong pricing power to offset the increasing negotiating power from the pharmacy benefit managers in the U.S. and restrictive pricing in developed markets outside of the U.S. While drugs carry patent protection, allowing firms to charge near monopolistic prices, a drug's true pricing power is determined by several factors, including its benefit to patients and its uniqueness. 

As segments within Big Pharma firms, animal health and consumer healthcare both carry strong moats, augmenting the moat strength derived in the human-branded drug segment. Overall, the moat analysis guides our discounted cash flow valuations, which support our view that Pfizer, Bayer, GlaxoSmithKline, and Sanofi are undervalued.

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