Morningstar’s top picks are companies with innovative drugs in unmet medical needs, such as Roche (ROG SW) and Allergan (AGN US), which are best positioned against sector consolidation and increasing pricing pressure in international markets. Despite major near-term headwinds, McKesson (MCK US) should remain an essential link in the pharmaceutical supply chain, with recent strategic moves to yield greater sourcing efficiency and increase top-line growth over the long term.
Steady growth outlook
Several secular trends underpin a positive outlook for the US pharmaceutical industry which should drive robust healthcare spending over the next several years. These include:
1. Demographic shifts from confluence of an aging U.S. population;
2. Influx of previously uninsured into the healthcare market with expansion of Medicaid coverage in many states; and
3. Greater use of pharmaceuticals as a front-line treatment will provide a platform for solid top- and bottom-line growth.
Within the healthcare's largest industry of drug and biotech companies by market cap, Morningstar expects the recent strong launches of innovative new drugs and pipeline advancements to reinforce the economic moats in the industry and support steady growth. Several recently launched drugs are expected to continue to gain market share and grow not dependent on pricing, but on strong efficacy data that will displace older drugs. In immuno-oncology, several recently launched drugs exemplify this trend. The immuno-oncology drugs offer some patients a near cure over older drugs that typically just delay progression of certain cancer types. In addition to tracking well with the initial indications, these immuno-oncology drugs are also posting excellent data in new indications, setting up a strong outlook for future growth. Beyond immuno-oncology, advancements in other therapeutic areas, such as immunology and cardiology, are also supporting major innovative advancements that are driving strong sales growth.