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3 pharma stocks with high growth potential

Glenn Freeman  |  08 Jun 2016Text size  Decrease  Increase  |  

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Companies in the US pharmaceutical sector were recently highlighted as key areas of interest for Kerr Neilson, co-founder and CEO of Platinum Asset Management (ASX: PTM).

"Because right now, there is a bit of a cloud over them, should Clinton come in," he said, speaking exclusively with Morningstar.com.au last month.

"And there is the concern of health-care costs ... medicines, actual drugs, are about 16 per cent of the US system's costs, the rest are legal fees and specialist fees and the whole operation of the infrastructure of hospitals and nursing homes ... So that's one industry we like."

Pharmaceutical companies also feature highly in Morningstar Australasia's Best Stock Ideas for June 2016.

ResMed

ResMed (ASX: RMD) is the largest pharmaceutical company covered by Morningstar Australasia.

"A narrow moat stock, ResMed has been affected by negative sentiment in recent months, generated by the disappointing results of the Serve-HF trial, which in turn has led to its shares trading at an attractive discount to our fair value estimate," says Chris Kallos, healthcare equities analyst, Morningstar Australasia.

He believes medical and treatment advances in areas such as sleep disorders and related aspects of cardiology represent considerable commercial opportunities for the company.

"The obstructive sleep apnoea business remains robust, and progress in the adjacent medical areas of chronic obstructive pulmonary disease is positive for growth," Kallos says.

"ResMed's integrated product suite creates an application ecosystem in sleep apnoea, thereby strengthening switching costs for clinicians and patients, and it stands to benefit from further weakening of the Australian dollar."

Sonic Healthcare

The largest private pathology player in the Australian private pathology testing market, Sonic Healthcare (ASX: SHL), holds a 40 per cent share of the local sector.

Having built scale through multiple acquisitions, which have been integrated using a well-established hub-and-spoke operating model, the business has driven synergy benefits domestically.

"We believe this will support the offshore growth strategy in the US and European markets," Kallos says.

"Regulatory risk concerns have increased recently because of an ongoing government review of funding arrangements under Medicare. However, in our opinion, Sonic's foreign exposure diversifies revenue streams and lowers the company's vulnerability to Australian funding risk."

International revenues as at the interim result for fiscal 2016 stood at 59 per cent of group revenues.

CSL

Narrow-moat CSL Limited (ASX: CSL) is Australia's largest exchange-listed healthcare stock, and the world's largest blood plasma fractionator by market capitalisation.

Its work in the high-demand influenza vaccine space is a particularly opportunistic focus for the company at present, according to Kallos.

"We believe integration of the Novartis cell-based influenza vaccine manufacturing operations with CSL's existing vaccine business ... is positive for shortening the path to market and increasing the company's global market share," he says.

"This, in conjunction with the launch of several new products, and the steady progress in the broad R&D pipeline, augurs well for earnings growth over the next five years."

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Glenn Freeman is a senior editor at Morningstar.

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