M&A in pharmaceuticals helps European shares extend rally

Tue Apr 22, 2014 12:34pm EDT

* FTSEurofirst 300 up 1.3 pct, Euro STOXX 50 up 1.4 pct

* Indexes extend gains after strong consumer confidence data

* Pharma boosted by AstraZeneca bid talk, GSK-Novartis swap

* Philips drops 4.7 pct after disappointing earnings

By Francesco Canepa

LONDON, April 22 (Reuters) - European shares rose on Tuesday, boosted by mergers and acquisitions activity in the pharmaceuticals sector and by bullish euro zone consumer confidence data.

The STOXX Europe 600 health care index rose 2.9 percent as AstraZeneca rallied on speculation about a bid approach from U.S. major Pfizer, while a deal to swap assets boosted GlaxoSmithKline and Novartis .

The global pharmaceuticals sector has seen a flurry of deal-making recently and analysts expect M&A activity to be a key driver for the shares in the coming months.

"Any stock in the industry is a target apart from the ones that are too big (such as Pfizer and Novartis)," said Lars Hevreng, an analyst at SEB Equities.

"It's simply a combination of very low financing costs and a strong-balance-sheet industry on one hand, and on the other hand consolidating companies that are still fairly similar to each other."

Shares in AstraZeneca surged 4.7 percent in London after Britain's Sunday Times newspaper reported at the weekend that Pfizer had approached its British rival to propose a 60 billion pound ($101 billion) takeover.

Major European stock markets had been closed since Thursday for the Easter holiday.

GlaxoSmithKline jumped 5.2 percent after it agreed to sell its oncology products to Novartis for $14.5 billion, while buying the Swiss firm's vaccines, excluding flu. Novartis' shares were up 2.3 percent.

The healthcare index is up around 6 percent so far this year, outpacing the broader market. It is trading at 15.9 times its expected earnings for the next 12 months, which is at a premium to its 10-year average price-to-earnings multiple, Datastream data showed.

The high valuations, however, were unlikely to discourage M&A activity, according to James Griffin, portfolio manager of the Fidelity MoneyBuilder Growth Fund.

"Any such deal between Pfizer and Astra, like the transaction between Glaxo and Novartis, would demonstrate how corporate buyers are willing to take a different perspective on valuation, taking a more fundamental and long-term view," Griffin said in a note.

The FTSEurofirst 300 index of top European shares closed 1.3 percent higher at 1,346.57 points, having extended gains in the afternoon after European Commission data showed euro zone consumer confidence rose more than expected in April.

The index has gained 3.4 percent since mid-April and is now just 0.5 percent off a near six-year high hit early this month.

The euro zone's blue-chip Euro STOXX 50 index added 1.4 percent to 3,199.69 points.

PHILIPS IN THE DARK

Shares in Philips tumbled 4.7 percent after the healthcare, lighting and consumer appliances group reported a bigger-than-expected fall in quarterly operating profit.

It also warned 2014 would be challenging, blaming unfavourable exchange rates and slowing demand for medical equipment in China and Russia.

The European earnings season has yet to start in earnest, with sales numbers out from just 5 percent of the STOXX Europe 600 index companies due to report. Half of those that have reported so far have missed analyst estimates, Thomson Reuters StarMine data showed.

"Behind the M&A noise, the earnings picture in Europe has not been very rosy so far," said Alexandre Baradez, chief market analyst at IG France.

"The market needs a real positive catalyst, such as a good string of corporate results or pro-active measures from the European Central Bank, otherwise this month's pullback will soon resume."

Europe bourses in 2014: link.reuters.com/pap87v

Asset performance in 2014: link.reuters.com/gap87v

Today's European research round-up (Editing by Mark Trevelyan)

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