News and Research for Dividend Select Portfolio Holdings
Diving Into the Drug Pricing Hit From the Inflation Reduction Act, We've Reduced Our FVEs by 2%
by Karen Andersen, CFA | Morningstar Research Services LLC | 09-19-22
After taking a closer look at what we consider the three key elements of the Inflation Reduction Act that will affect the biopharma industry over the next decade, we're reducing our fair value estimates for 17 of the biggest biopharma names in Morningstar's coverage by an average of 2%. We think the step-down in U.S. branded drug sales from capping Medicare price increases to inflation (fully rolled out in 2023), redesigning Medicare Part D (beginning in 2025), and Medicare negotiation (beginning in 2026 for small molecules) will result in a 3% reduction in total sales for these firms by 2031, with firm-level reductions depending on the firm's reliance on the U.S. market, proportion of the portfolio targeting seniors, history of price increases, and relative size of its small molecule and biologics portfolios (as biologics are immune from Medicare negotiation for 13 years instead of nine). Our estimates factor in some ability for the industry to either benefit from certain changes (like potential increased prescription fill rates in Part D with lower out-of-pocket costs) or compensate for headwinds (like responding to inflation caps on price increases with higher launch prices). Overall, we think the effect of the
Inflation Reduction Act is manageable for the industry, and we see the competitive advantages and economic moats of these firms remaining intact.
Turning to the effects on individual firms, we think firms with higher exposure to these policy changes include AstraZeneca (oncology negotiation), Bristol (expensive oncology drugs), Gilead (HIV negotiation), and Novo Nordisk (Ozempic negotiation and list price increases). Factors reducing exposure include low Medicare exposure (Biogen and BioMarin), global diversification (BioMarin, Pfizer, and Roche), and biologics focus (BioMarin and Roche).
A Fair Value Reduction for Amgen
by Karen Andersen, CFA | Morningstar Research Services LLC | 09-19-22
We're slightly lowering our fair value estimate for Amgen to $255 from $260 after accounting for the impact of the Inflation Reduction Act on Amgen's product sales. We include a 2% step-down in U.S. sales in 2023 to account for Medicare inflation caps and a 1% step-down in U.S. sales in 2025 to account for Medicare Part D redesign in our valuation. We also assume Medicare negotiations could reduce sales of Otezla, Repatha, and Lumakras prior to patent expirations.
A Fair Value Reduction for Johnson & Johnson
by Damien Conover, CFA | Morningstar Research Services LLC | 09-19-22
We are decreasing our fair value estimate for J&J to $164 from $167 based on likely headwinds from the Inflation Reduction Act that limits Medicare price increases to inflation and mandates Medicare rebates after drugs have been on the market for a prolonged period of time.
Boosting Starbucks' Fair Value Estimate
by Sean Dunlop | Morningstar Research Services LLC | 09-16-22
We're raising our fair value estimate for Starbucks to $104 per share (from $100 previously) as we incorporate management's strong investor day guidance for 10%-12% average annual sales growth and 15%-20% EPS growth through 2025, which strikes us as plausible. The firm's operational investments appear to alleviate key pain points in the business model, while the firm's international growth narrative, particularly in China, remains in the early innings. Our fair value estimate implies a price/2023 earnings of 41 times and 21 times enterprise value/2023 EBITDA. Consistent with management guidance, we expect medium-term margin pressure (with operating margin clocking in at just 12.8% in 2022, down 320 basis points from a year ago), before gradually recovering to historical levels (16%) by fiscal 2026.
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