The European pharmaceutical sector is expected to have a promising year ahead, thanks to robust cash flows and attractive valuations, according to analysts at UBS. While they highlighted four stocks that are likely to benefit, they expressed caution about weight-loss drug pioneer Novo Nordisk and adopted a bearish outlook on AstraZeneca.
UBS analyst Matthew Weston and his team assigned a Buy rating to Major pharma companies such as GSK, Sanofi, Merck KGaA, and Novartis, citing their appealing entry points and potential earnings growth.
GSK, headquartered in London, stands out for its sales potential of the Shingrix shingles vaccine. Last year, the company struck a deal for its distribution in China, which could result in sales exceeding expectations.
UBS raised its rating on GSK stock from Sell to Buy and set a target price of £18.60 ($23.53), up from £13.10. Although GSK shares saw a slight decline on Tuesday (0.2% in London and 0.4% in premarket trading in the US), the positive outlook remains intact.
However, the UBS team expressed reservations about Novo Nordisk due to its high trailing price-to-earnings multiple of approximately 40 times. This significantly surpasses its competitors’ multiples, driven by the hype surrounding its blockbuster anti-obesity medications Wegovy and Ozempic.
“While we can justify Novo Nordisk’s current levels based on growth and earnings momentum, we struggle to stretch the valuation further to support a more positive stance,” Weston wrote.
Overall, with strong cash flows and attractive valuations, the European pharmaceutical sector presents opportunities for investors. GSK, Sanofi, Merck KGaA, and Novartis are particularly appealing options, while caution is advised when considering Novo Nordisk.
Weston Places Neutral Rating on Novo Nordisk
Weston, a notable analyst, has given Novo Nordisk a Neutral rating with a target price of 795 Danish kroner ($116). Despite this, the stock only saw a modest increase of 0.1% and traded at 736.50 kroner on Tuesday. ADRs, on the other hand, experienced a 0.9% decrease in Tuesday’s premarket trading and settled at $106.22.
UBS Analysts Back Novartis and Sanofi
The UBS analysts show confidence in Novartis and Sanofi due to the potential success of their respective drugs. Novartis has promising prospects in cancer treatment, chronic spontaneous urticaria, and multiple sclerosis. As for Sanofi, the near-term growth potential of their hemophilia and lung-disease drugs is highly anticipated. Interestingly, Sanofi ADRs experienced a 1.1% decrease in Tuesday’s premarket trading, while Novartis ADRs remained flat.
Merck KGaA Set for Strong 2024
UBS analysts predict a strong performance for Merck KGaA in 2024. They believe that the company’s Life Science and Electronics divisions will recover from the post-Covid destocking and semiconductor weakness respectively. This positive outlook positions Merck KGaA as a contender for future success.
Walton Downgrades AstraZeneca
However, Walton, another reputable analyst, has downgraded UBS’s rating on AstraZeneca from Buy to Sell. The target price was also decreased from £130 to £107 ($135.34). Consequently, AstraZeneca stock suffered a significant decline of 2.5% and traded at £105.86 in London. ADRs fell even further with a decrease of 3.4% in premarket trading.
The downgrade is a direct result of the Inflation Reduction Act of 2022. This legislation will transfer the burden of catastrophic drug costs from Medicare and patients to private insurers and drug manufacturers. Weston and his team are particularly concerned about the impact this will have on AstraZeneca. They anticipate significant price pressure, especially with the shift in funding for expensive Medicare prescription drugs, which will no longer rely on government support but instead be shouldered by Pharma/PBMs (pharmacy-benefit managers).
In conclusion, Weston’s neutral rating for Novo Nordisk, UBS analysts’ support for Novartis and Sanofi, and Walton’s downgrade of AstraZeneca signify important developments in the pharmaceutical industry. These decisions and predictions will undoubtedly shape the future landscape of these companies.