5-Star Opportunities in Big Pharma

One of the primary debates at the Morningstar Investment Conference was over big pharma. Some managers, such as David Winters of  Wintergreen Fund  and Rajeev Bhaman of  Oppenheimer Global (OPPAX), worried that sluggish research and development and possible government intervention limited the potential of the industry. Others, such as Diana Strandberg of  Dodge & Cox Global (DODWX) and  Dodge & Cox International (DODFX), thought several big pharma companies were undervalued due to overstated worries, and were attractive not only for their cheap prices, but also for their sturdy cash flows.

At Morningstar, we think there are a handful of worthy firms available at great prices, presenting solid opportunities even in light of the industry risks. We used Morningstar's  Premium Stock Screener to look for 5-star stocks in the drug industry with market caps above $150 million.

Below are three of the stocks that passed. Click here to  run this screen yourself here.

 GlaxoSmithKline PLC (GSK)
Price: $34.09 | Fair Value Estimate: $49 | Moat: Wide | Uncertainty: Medium

From the  Analyst Report:
Generics are hurting Glaxo's near-term growth, but the company is laying the foundation for improved future growth with the launch of several vaccines. The firm recently launched pneumococcal vaccine Synflorix in Europe, which we believe will develop into a blockbuster. Glaxo's other recent vaccine launches that are likely to develop into blockbusters include human papillomavirus vaccine Cervarix and rotavirus vaccine Rotarix. We expect Cervarix will launch in the United States in 2010. 

 Johnson & Johnson (JNJ)
Price: $56.29 | Fair Value Estimate: $80 | Moat: Wide | Uncertainty: Low

From the  Analyst Report:
Johnson & Johnson stands alone as a leader across the major health-care industries. The company maintains a diverse revenue base, a robust research pipeline, and exceptional cash-flow generation that together create a wide economic moat. Patent losses on antipsychotic Risperdal and neuroscience drug Topamax, as well as recent side-effect concerns with anemia drug Procrit, will weigh on near-term performance. However, we remain confident that the company's breadth can overcome these issues.

 Pfizer (PFE)
Price: $15.09 | Fair Value Estimate: $26 | Moat: Wide | Uncertainty: Medium

From the  Analyst Report:
Pfizer's foundation remains solid based on strong cash flows generated from a basket of diverse drugs. The company's large size confers significant competitive advantages in developing new drugs. This unmatched heft, combined with a broad portfolio of patent-protected drugs, has helped Pfizer build a wide economic moat around its business.

Pfizer's size establishes the largest economy of scale in the pharmaceutical industry. In a business where drug development needs a lot of shots on goal to be successful, Pfizer has the financial resources and the established research power to support the development of more new drugs. We believe Pfizer will be more of a cost-reduction story versus a top-line growth company over the next several years, and the past quarter shows solid execution on cost savings.