Quarter-End Insights

Healthcare: Drug Pricing Concerns Weigh on Valuations, Creating Opportunities

Damien Conover, CFA
  • Overall, healthcare valuations have slightly fallen to a price/fair value of 0.98, down from 1.01 at the end of the first quarter and 1.04 at the start of the year, but the differences in industry valuations continue to suggest drug, biotech, and drug supply chain industries are the most undervalued areas. Within these industries, our top picks are  Allergan (AGN),  Roche Holding (RHHBY), and  McKesson (MCK).
  • U.S. governmental reforms addressing drug pricing should not have a material impact on the most profitable region of the world, which should ease pricing concerns that are weighing on the drug and biotechnology industries.
  • Research and development trends continue to deliver strong data in areas of unmet medical need, such as cancer and immunology, which should drive strong long-term growth for drugs with solid pricing power.
  • The strong cash flows of the largest healthcare companies continue to focus on acquisitions and share repurchases and we expect an acceleration of acquisitions through the reminder of the year.

Damien Conover, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.