Drug price pressure holds pharma stocks back on Wall Street, Morningstar says

While many healthcare stocks had a banner year in 2015, political pressure on drug prices is keeping some major pharmaceutical and biotech companies from hitting their full market potential, according to a recent analysis by Morningstar.

In fact, analysts said Amgen, Biogen, and BioMarin Pharmaceutical are particularly undervalued.

"In general, it's becoming more of a stock picker's environment," said Damien Conover, director of healthcare equity research and equity strategy for Morningstar. "The stocks should do well, despite the political rhetoric coming out of Washington."

Politicians are targeting rising drug prices in the wake of higher pharmaceutical spending and high-profile cases of price hiking, like former Turing Pharmaceutical CEO Martin Shkreli's decision to boost the price of a life-saving AIDS drug by 5,000 percent this fall. But Morningstar said the rhetoric is doing more to increase volatility in the markets. Without major structural reform, and a willingness by patients and doctors to limit treatment options, analysts don't expect any major changes in drug prices in the near future.

[Also: Martin Shkreli fired from KaloBios, says 'pharma bro' persona led to federal probe]

Biogen, a player in the multiple sclerosis market, offers injectable, oral and high-efficacy treatments. The MS market is becoming more competitive, "but we still think Biogen has a dominant portfolio that can withstand this pressure, and we assign the firm a stable wide moat rating," according to the analysis. Conover defines a "moat," in this context, as "a competitive advantage that is strong enough to keep competitors at bay for a very long time." A "wide moat" assumes about 20 years of market protection.

BioMarin, meanwhile, focuses on ultra-rare diseases. And while a hyperactive development pipeline is keeping research expenses high and digging into profitability, Morningstar expects that the company will soon make the leap from four key marketed products to eight. That, combined with BioMarin's lack of competition, should bode well, said Conover.

And then there's Amgen.

[Also: Senate committee to scrutinize drug prices set by Valeant, Turing, Retrophin and Rodelis]

"Amgen has several innovative biologic therapies that have turned into blockbuster products and generated consistently high returns on invested capital," according to the analysis. It still gets a "wide moat" designation despite the fact that about 40 percent of its total sales are at risk to biosimilars. Morningstar said the company's fast-growing approved drugs, as well as the emerging cardiovascular drug Repatha, should help it rise above biosimilar competition.

"Some of this stuff is stock specific, and some of it is bigger picture trends," said Conover. "Any firm that's focused on an unmet medical need, that's going to be an area where things are likely to happen. You're likely to get quicker approvals by the regulatory agencies, and potentially more important, you're going to have very strong pricing power."

Like Healthcare Finance on Facebook

Some firms, he said, may be undervalued because of a minor event in their past that has shaken investor confidence, but he expects that their competitive advantages will be enough to offset that.

Another factor having an impact on healthcare stocks: The ongoing trend toward mergers and acquisitions.

"The main thing that's driving that is different players on both sides of the equation that are buying things -- they're getting bigger," said Conover. "There's a lot of pressure to get bigger ... to negotiate better prices. Both sides want to get leverage in the negotiation."

Twitter: @JELagasse