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3 Takeaways From Large-Cap Pharma Earnings

We see some opportunity for investment, especially in Merck.

Damien Conover: The majority of the large-cap pharmaceutical stocks have reported 2019 results. And the results are largely as we anticipated. However, I think there's a few really important takeaways from this recent earning season.

First off, drugs that are innovative, targeting areas of unmet medical need, are really driving growth. This is different than a decade ago when the pharmaceutical firms were really targeting drugs that had me-too indication, slight improvements. That's different. With a lot of new pipeline drugs coming out of the early stages of development and into the market, we're really starting to see a lot of growth in drugs that target areas like oncology and immunology. So growth is really starting to improve.

The second point is these drugs that are driving the growth tend to have very strong pricing power and don't need a lot of marketing support because they're targeting more niche indications. So what that means is: improving margins. So these strong margins not only support the results but also reinforce our view that this industry has a lot of wide-moat companies within it.

The third point is from a valuation perspective. While we don't see as much opportunity as we once did about a year ago, we still see a few stocks that look undervalued. One of the names we like right now is Merck. Merck is very well-positioned in immuno-oncology. Their key drug, Keytruda, looks well-positioned for a lot of growth, and we think it's underappreciated by the market. We also think this drug is really emblematic of some of the themes we're talking about. It is a specialty drug with strong pricing power that should drive improving margins for Merck going forward.

So overall, we've seen a good earning season from the large-cap pharmaceutical stocks, and we do see some opportunity for investment, especially in Merck.

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