Nomura reiterates its bearish outlook on European pharmaceuticals, citing “rocky” fundamentals and expensive valuations, although it upgrades several price targets in light of the recent rally.
European pharmaceuticals have been popular because of a market-wide trend towards so-called defensive stocks that are seen as resilient in economic uncertainty, rather than because of attractiveness in the fundamentals of the stocks, according to analyst Dr Amit Roy at Nomura.
“Virtually all the large-cap EU Pharma companies trade within a narrow range of Price to Earnings ratios (P/Es), with only modest sensitivity to their differing earnings growth profiles, suggesting they continue to trade as a defensive block rather than on stock-specific fundamentals,” he writes.
European healthcare added 12 percent last year, and now all major pharmaceuticals in Europe except AstraZeneca trade with a forward P/E ratio of between 11.5 and 14, according to Thomson Reuters Starmine SmartEstimates.
This compares to a P/E ratio average of 11.0 in Food and Tobacco, another sector perceived as defensive.
“However, we do not believe the fundamentals (in pharamceuticals) merit this premium,” Roy adds.
“We have seen little evidence of improvement in 2012, as the industry continues to face the same risks - patent expiry, pipeline failures, increasing concerns in Europe over austerity (drug pricing) - while emerging-market-driven growth continues to slow.”
Nomura downgrades Merck KGAA to “neutral” from “buy”, with the German stock down 1.9 percent against a gain of 0.1 percent for the sector in Europe, to reflect earnings estimates which imply a target price of 95 euros.
However, the sector’s multiple expansion of last year leads Nomura to increase its target prices for Roche, GlaxoSmithKline and AstraZeneca, although for all these companies these are still below the current trading prices.
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