Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

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Thematic (Sector/Industry)

Germany Health care / Thematic (Sector/Industry)

<ul><li class="p1">Pipeline innovation outpacing patent losses represents a core element of the wide moat ratings for most of the Big Pharma firms.</li><li class="p1">Slowing patent losses over the next five years should accelerate the growth rates of the Big Pharma firms and increase the returns on invested capital as new pipeline drugs launch.</li><li class="p1">Overall, we view the Big Pharma group as moderately undervalued and we are more bullish than 2020 consensus estimates on the pipelines for Bristol ($2 billion above), Merck ($3 billion above) and Sanofi ($1 billion above) and view these stocks as undervalued</li></ul>Key Takeaways:<ul><li class="p1">Top scoring Sanofi looks both undervalued and well-positioned based on a top-tier pipeline, robust growth from currently marketed products, and minimal patent losses during the next five years. Sanofi&rsquo;s steadily growing rare disease, consumer, vaccine, and animal health segments combined with an improving late-stage and mid-stage pipeline, led by the recent approval of Praluent, more than offset limited generic competition to long-acting insulin Lantus. (See page 4 for complete ranking).</li><li class="p1">Adjusting for total size, Bristol scores at the top of the group and looks undervalued, largely driven by a powerful entrenchment in immuno-oncology that sets up industry-leading growth. Bristol&rsquo;s likely first-mover advantage in several cancer indications with Opdivo along with multiple combination cancer assets in early-stage development should lead to Bristol gaining over a third of the $30+ billion immuno-oncology market by 2022.</li><li class="p1">With the lowest overall score, AstraZeneca&rsquo;s growth outlook is weighed down by several patent losses. Despite the poor outlook, we believe AstraZeneca looks fairly valued and holds several underappreciated early pipeline assets, including AZD1775 (WEE-1 for cancer) and AZD3293 and MEDI1814 (Alzheimer&rsquo;s).</li><li class="p1">Lingering patent losses following the patent cliff peak in 2012 have finally worked through the system, and Big Pharma&rsquo;s five-year generics exposure looks the lowest since before 2010. The group&rsquo;s outlook for growth is improving as we see declines annualize for several blockbusters including Nexium, Abilify, Cymbalta, Evista, Diovan, and Celebrex.</li><li class="p1">In aggregate, we view the Big Pharma industry as 7% undervalued, largely driven by overly pessimistic pipeline expectations. Relative to consensus, we are projecting higher sales for several early stage drug candidates as well as approved drugs with expanding indications, including immuno-oncology drugs Opdivo (Bristol) and Keytruda (Merck), women&rsquo;s health drug Elagolix (AbbVie), and staph vaccine SA4Ag (Pfizer). See page 3 for a complete list of underappreciated Big Pharma drugs. Additionally, on page 3, we highlight the largest potential drugs that have very low awareness from the investment community.</li></ul>Analysts: Damien Conover CFA &amp; Sonia Vora

Pipeline innovation outpacing patent losses represents a core element of the wide moat ratings for most of the Big Pharma firms.Slowing patent losses over the next five years should accelerate the growth rates of the Big Pharma firms and increase the returns on invested capital as new pipeline drugs launch.Overall, we view the Big Pharma group as moderately undervalued and we are more bullish than 2020 consensus estimates on the pipelines for Bristol ($2 billion above), Merck ($3 billion above) and Sanofi ($1 billion above) and view these stocks as undervaluedKey Takeaways:Top scoring Sanofi looks both undervalued and well-positioned based on a top-tier pipeline, robust growth from currently marketed products, and minimal patent losses during the next five years. Sanofi&rsquo;s steadily growing rare disease, consumer, vaccine, and animal health segments combined with an improving late-stage and mid-stage pipeline, led by the recent approval of Praluent, more than offset limited generic competition to long-acting insulin Lantus. (See page 4 for complete ranking).Adjusting for total size, Bristol scores at the top of the group and looks undervalued, largely driven by a powerful entrenchment in immuno-oncology that sets up industry-leading growth. Bristol&rsquo;s likely first-mover advantage in several cancer indications with Opdivo along with multiple combination cancer assets in early-stage development should lead to Bristol gaining over a third of the $30+ billion immuno-oncology market by 2022.With the lowest overall score, AstraZeneca&rsquo;s growth outlook is weighed down by several patent losses. Despite the poor outlook, we believe AstraZeneca looks fairly valued and holds several underappreciated early pipeline assets, including AZD1775 (WEE-1 for cancer) and AZD3293 and MEDI1814 (Alzheimer&rsquo;s).Lingering patent losses following the patent cliff peak in 2012 have finally worked through the system, and Big Pharma&rsquo;s five-year generics exposure looks the lowest since before 2010. The group&rsquo;s outlook for growth is improving as we see declines annualize for several blockbusters including Nexium, Abilify, Cymbalta, Evista, Diovan, and Celebrex.In aggregate, we view the Big Pharma industry as 7% undervalued, largely driven by overly pessimistic pipeline expectations. Relative to consensus, we are projecting higher sales for several early stage drug candidates as well as approved drugs with expanding indications, including immuno-oncology drugs Opdivo (Bristol) and Keytruda (Merck), women&rsquo;s health drug Elagolix (AbbVie), and staph vaccine SA4Ag (Pfizer). See page 3 for a complete list of underappreciated Big Pharma drugs. Additionally, on page 3, we highlight the largest potential drugs that have very low awareness from the investment community.Analysts: Damien Conover CFA &amp; Sonia Vora

Mettler Toledo International Inc (MTD US)

Laboratory Corporation of America Holdings (LH US)

Laboratory Corporation of America Holdings

Healthcare Observer: As Long-Term Patent Exposure Ebbs, Innovation in Big Pharma Pipelines Support