Analyst Note| Damien Conover, CFA |
Most Big Pharma and Big Biotech stocks in our coverage support wide economic moats as a result of their ability to generate new drugs to replace mature ones losing patent protection. Innovation is the central building block for the strong economic moats in the drug and biotechnology industry, supporting drug pricing power and launch trajectories. However, following patent expirations, drug sales fall significantly, making the continuous cycle of new drugs essential to the moats in the industry. In looking at the leading large-cap U.S. and European drug and biotech industries, we expect steady innovation to drive 5% annual sales growth over the next five years, similar to consensus expectations. Overlaying our growth analysis with valuation, we see underappreciated areas: Roche's Tecentriq in several cancer niches; Bristol-Myers Squibb's steady position in immuno-oncology and massive pipeline and cash flow support from Celgene; Merck's oncology portfolio and vaccine and animal health cash flows; and Pfizer's new immunology drugs and strong vaccine positioning.