Morningstar - Q3 2022 - 67

EXHIBIT 1
Worthy of Consideration These big biopharma companies warrant a look when the valuation is right.
Name
AstraZeneca AZN
Biogen BIIB
BioMarin Pharmaceutical BMRN
Eli Lilly LLY
Gilead Sciences GILD
GlaxoSmithKline GSK
Roche RHHBY
Sanofi SNY
Source: Morningstar Direct. Data as of 06/30/2022.
Economic Moat
Wide
Wide
Narrow
Wide
Wide
Wide
Wide
Wide
Price ($)
66.07
203.94
82.87
324.23
61.81
43.53
41.71
50.03
Fair Value ($)
68.00
343.00
105.00
262.00
81.00
53.00
55.00
61.00
P/FV
Morningstar Rating
0.97 QQQ
0.59 QQQQQ
0.79 QQQQ
1.24 QQ
0.76 QQQQ
0.82 QQQQ
0.76 QQQQQ
0.82 QQQQ
Medium
Medium
Medium
High
Medium
Low
Medium
Medium
ESG Risk Rating
Assessment
Fair Value
Uncertainty
Medium
High
Medium
Medium
Medium
Medium
Low
Medium
Capsules
N/A
1
5
N/A
N/A
3
3
5
the cost of some new medicines, and Hillary
Clinton announced potential policy changes
that could affect drug prices. Previously suggested
reforms range from things like price control-
setting prices at levels that mirror other developed
markets, which could cut some prices in half-
to smaller efforts that would reduce out-of-pocket
costs for seniors. The last real attempt was
the Build Back Better Act, which passed the House
in late 2021 but stumbled in the Senate earlier this
year. Democrats are trying to pass a pareddown
version of the bill through the reconciliation
process this summer, and if drug policy changes
remain similar to the Build Back Better Act,
that could lead to mid-single-digit pressure on U.S.
branded drug sales, on average.
But getting consensus even among just Democrats
has been really difficult. And as we're heading
into another election season, I'd note that
Republicans tend to favor policy reform that would
probably have only a low-single-digit impact on
U.S. sales for these biopharma firms.
Lallos: These are multinational companies, but U.S.
policy has a tremendous impact. Why is that?
Andersen: It's two things: population and
prices. The U.S. might be only 5% of the world's
population, but it's about a quarter of
the developed world's population. Then add
the fact that prices in the U.S. can be, as
I mentioned, close to double the prices in other
developed markets-and drug firms can increase
prices annually in the U.S. So, there's a huge
discrepancy in price and higher profitability for
these drugs in the U.S. We estimate the U.S.
accounts for almost half of Big Biopharma profits.
Lallos: Morningstar is using information from ICER
to evaluate pricing risk. What is ICER?
Andersen: ICER is an independent private
organization that looks at cost-effectiveness of
drugs. They are getting a lot of attention
from drug companies and from payers who look
to their analysis for advice.
ICER tends to focus on drugs or therapeutic
areas where there's been some recent innovation,
and there might be questions on how the
drugs should be priced. Based on the efficacy
and the safety data from clinical trials, they
determine a threshold for a fair price. They're
trying to determine how much a drug can extend
life or improve quality of life and then use an
accepted benchmark to come up with the highest
price. In the U.S., the benchmark is roughly
$150,000. That's a common threshold for what
we'd be willing to pay for an extra year of life.
Lallos: How is ICER's analysis factored into
Morningstar's new capsule system?
Andersen: The capsule system is a way to assess
ESG risk that's tied to U.S. drug pricing. It
combines ICER's cost-effectiveness analysis, recent
net drug price increases that are estimated by
Morningstar and by ICER, and then Morningstar's
own forecast for 2025 U.S. drug sales. We focus on
the top five bestselling drugs in our forecast to
determine the final capsule scores for each firm,
ranging from 1 to 5.
Lallos: Can you explain the relationship between
cost-effectiveness and ESG risk?
Andersen: We're trying to isolate firms that
aren't pricing their drugs fairly-either current
prices, which is tied to cost-effectiveness,
or price changes, which may be unsupported price
increases. Firms that don't score well in the
capsule system tend to have higher exposure to
a material ESG issue in the Sustainalytics
methodology, access to basic services. Depending
on how the firm's exposure to this issue differs
from average for other reasons beyond the capsule
system, and depending on their management
score, that could have bigger implications for the
firm's overall ESG risk rating.
Lallos: Which ESG header does this issue land within?
Andersen: We put it under the S. In general,
for biopharma, the risks that we see are
more social. It includes product governance: Are
they selling drugs that are, in fact, safe in
the long term? And access to basic services, which
is where we put pricing issues. For Morningstar,
for the purposes of our valuation models,
the most impactful issue is are they pricing drugs
fairly in large markets, and is that something
that's going to hold back access or create high
out-of-pocket costs for Americans?
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Morningstar - Q3 2022

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