Europe’s big five pharma players desperately need their pipelines to come up with the goods if the sector is going to merit anything other than a neutral rating, according to a report from UBS Investment Bank.
Gbola Amusa, UBS’ pharmaceuticals analyst, has initiated coverage on the large-cap European pharmaceutical companies – GlaxoSmithKline, Roche, Sanofi-Aventis, AstraZeneca and Novartis – and given that particular sector the aforementioned rating, although Novartis is his top pick of the five. Mr Amusa notes that the potential for stronger-than-expected near-term earnings “is unlikely to offer comfort” relative to the mid-to-longer-term “fundamental challenges” the sector faces and consequently “we do not expect further near-term strength to result in a sustainable valuation re-rating.”
Those challenges include “an inflow problem” as lower R&D productivity volume growth for branded pharmaceuticals is decelerating, UBS claims, noting that on a shorter-term basis, challenges to volume growth have also increased in 2007 thanks to the benefits seen from the US Medicare Part-D programme. There is also “an outflow problem”, which means that long-term growth visibility “is significantly clouded by patent expirations” and Mr Amusa also spoke of a political problem, namely uncertainty pertaining to the outcome of the upcoming US presidential elections, unfavourable legislative initiatives by the Democrats, and “continued conservatism” on the part of the US Food and Drug Administration.
Regarding the specific companies, Novartis tops the analyst’s list “due to its superior growth and attractive valuation”. Mr Amusa added that consensus expectations for key growth franchises, such as blood pressure drugs Diovan (valsartan), Tekturna (aliskiren) and Exforge (amlodipine plus valsartan), the anti-cancer agent Glivec/Gleevec (imatinib) and the osteoporosis drug Aclasta/Reclast (zoledronic acid) “are well below our estimates and company guidance of double-digit pharma growth from 2009 to 2011”. As a result, “a short-term opportunity to play the shortfall of consensus relative to our expectations exists” ahead of Novartis’ business review on September 12 in East Hanover, New Jersey.
Longer- term, UBS likes Novartis due to “its young product portfolio, its position as the global leader in innovative drug launches since 2000, and its multiple layers of protection heading into the generics ‘cliff’.” The analysts have neutral recommendations on the other stocks “in the large-cap pharma universe” and at current levels, favour GlaxoSmithKline, followed by Roche, AstraZeneca and Sanofi-Aventis.