Karen Andersen: We've published our annual drug pipeline report, including a detailed analysis of the 19 largest branded pharma and biotech names in Morningstar's coverage. While U.S. pricing pressure is an overhang, most of these firms can support wide moats as a result of their ability to generate new drugs to replace those losing patent protection. We see these firms as roughly 10% undervalued on average. We think the market underappreciates Roche's strong position in immuno-oncology, and the Celgene acquisition gives undervalued Bristol access to strong cash flows through 2022 and nine potential blockbusters. Biogen's deep neurology pipeline doesn't appear to be fully valued by the market, and Biomarin has a solid rare-disease drug foundation poised to expand in 2020.
Large-cap drug firms feed their pipelines with internal research as well as acquisitions, such as Bristol's pending acquisition of Celgene. We think Pfizer, Merck, and J&J are best positioned to make acquisitions, given several logical targets, solid financial positioning, and strong share prices. Biogen and Biomarin look like targets, given their undervalued shares and focused portfolios. Pfizer could consider buying Bristol after the Celgene acquisition closes if valuations remain compelling, as this would greatly expand its oncology portfolio and pipeline. We also see Merck and Lilly as a compelling combination, as Lilly would give Merck diversification away from immune-oncology blockbuster Keytruda, and there is a fit between their oncology and diabetes portfolios.