European pharmaceuticals

Since the European market’s post-crisis peak in February, only one sector has (just) gained ground – pharmaceuticals. Against the backdrop of a 20 per cent market tank, the 1 per cent growth in drugmakers’ prices looks stellar. And third-quarter results, which commence this week, should follow a steady track. Each of the Big Five European drugmakers has a key signal to watch.

Novartis’ investors want to see sales growth of at least 7 per cent in the now fully acquired Alcon eyecare division. At Roche, shareholders will watch the demise of the curtailed cancer drug Avastin which generated 15 per cent of its revenues last year (sales fell 10 per cent last quarter).

AstraZeneca’s investors should watch Crestor, its cholesterol medicine. Sales growth has slowed this year and with generic versions of competitor Lipitor due to hit shelves in November, Crestor’s third-quarter growth may be an indicator of future sales. At GlaxoSmithKline, the key is the company’s very hard to copy family of asthma drugs – its meal ticket for the next decade. Sanofi-Aventis investors, meanwhile, will pore over the impact of its recently lost patents.

Stepping back, investors should watch for the impact of recent government cuts to drug prices. Deutsche Bank estimates average European drug prices could fall 6 per cent this year. That, however, will be partly offset by cost cuts. While the broader market’s operating margin is currently about 20 per cent on Bloomberg data, UBS expects drugmakers’ margins to grow a 10th to almost 40 per cent this year.

That makes European drugmakers look attractive. The sector now trades at 10 times its forward earnings – the same as the broader market. Given drugmakers’ return on equity of 42 per cent is about three-quarters higher, there appears to be further upside potential.

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