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5 Drug Firms on Cutting Edge of Innovation

Karen Andersen, CFA

Karen Andersen: Branded drugmakers have come under scrutiny for high prices and annual price increases, and the landscape for negotiating discounts with payers has become more competitive. Even though reduced pricing pressure hits the top line for drug firms, we think some drugmakers are successfully using manufacturing improvements to offset pressure on the bottom line. Overall, across the industry, we see gross margins staying relatively steady at a strong 76% over the next five years, as manufacturing improvements and very strong, 95%-plus gross margins on many differentiated and effective therapies counter increased headwinds from pricing on older products and royalty and profit share payments to partners.

Following our deep dive into drug manufacturing and gross margins at 20 narrow and wide moat drug firms under our coverage, we'd like to highlight a few names that stand out for their combination of manufacturing expertise and undervalued stocks. For example, in big pharma, Glaxo and Sanofi are both committed to more efficient continuous manufacturing practices, which are slowly being adopted across the drug industry. In biotech, Biogen, Biomarin, and Roche are all undervalued and are benefiting from novel manufacturing technologies. Biogen's improving productivity makes their ability to serve a sizable potential Alzheimer's market more feasible. BioMarin is poised to see a large gross margin improvement as new drugs launch and as the firm makes progress with novel gene therapy manufacturing. Roche's large manufacturing capacity expansion should give it the flexibility it needs to manufacture a variety of novel and complex biologics. 

Overall, we see several ways to invest in drug firms that are on the cutting edge of manufacturing innovation.