瑞信-全球-投资策略-全球股票策略：将欧洲制药公司的评级下调至基准-2019.4.26-21页.pdf

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES,ANALYST CERTIFICATIONS,LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS.US Disclosure:Credit Suisse does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report.Investors should consider this report as only a single factor in making their investment decision.26 April 2019GlobalEquity ResearchInvestment Strategy Global Equity Strategy STRATEGYResearch AnalystsAndrew Garthwaite44 20 7883 6477andrew.garthwaitecredit-Robert Griffiths44 20 7883 8885robert.griffithscredit-Nicolas Wylenzek44 20 7883 6480nicolas.wylenzekcredit-Mengyuan Yuan44 20 7888 0368mengyuan.yuancredit-Kartikeya Upadhyay44 20 7888 2339kartikeya.upadhyaycredit-Asim Ali44 20 7883 2480asim.alicredit-Downgrading European Pharma to benchmarkWe take European Pharma down to benchmark,reversing our move to overweight in May 2018.We reduced weightings twice when we added to cyclicals(in December 2018 and in March 2019),and the sector has outperformed by 9%over the past 12 months,but we now fully reduce to benchmark.Our concerns are:Macro:Pharma tends to be the worst performing sector when PMI new orders rise in Europe,and we see evidence that PMIs are turning.The sector appears to be discounting PMI new orders consistent with virtually zero GDP growth.Pharma is also one of the largest dollar earners and thus one of the worst performing when the dollar weakens.From here,we think the euro appreciates against the dollar.An uncertain pipeline outlook:Probability-adjusted new drug approvals are at a three-year low.We view the sharp fall in asset turns versus the market as a sign of a disrupted business model.Pricing:In the US,drug PPI and drug CPI relative to core inflation are at 18-year lows.The US accounts for over half of global pharma revenues.Politics:Both President Trump and his challengers have stepped up their rhetoric on Pharma.Most Democratic candidates appear to want a single-payer system as well as price caps and cheap overseas drug imports(to avoid such measures,we note that drug companies agreed to contribute$80bn to healthcare reform a decade ago).European Pharma has yet to fully reflect the weakness seen in US health insurers/PBMs YTD.Fundamental problems:We think US branded drug prices are unlikely to be sustained at over 50%above those in Europe at a time when the government accounts for 42%of drug spending(cf 24%a decade ago),and given the current US fiscal situation and demographics.US health spending is more than double OECD norms despite lower life expectancy than many developed countries.Technically disrupted:i)70%of drugs are non-unique;ii)69%of drugs are bought in;iii)the rise in value-based contracts might diminish the value of a blockbuster;and iv)there is a clear risk that biosimilars might trade on larger discounts than expected.What stops us going underweight:1)Valuations are middling on P/E vs the market,although European Pharma is no longer cheap vs US peers;2)low leverage;3)high self-help potential(SG&A and R&D are triple that of the market);4)22%of revenue comes from GEM,where fundamentals are attractive;and 5)Pharma typically underperforms only 6-12 months before a US presidential election cycle ends.The money we take out of Euro Pharma we add to Euro cyclicals(we went overweight on March 15).Stock screen:Expensive European Pharma companies that are Underperform-or Neutral-rated with negative earnings revisions on Credit Suisse HOLT are:Orion,GlaxoSmithKline and Recordati.26 April 2019Global Equity Strategy2Euro big-cap Pharma:down to benchmarkWe take big-cap pharma in Europe down to benchmark.This reverses our upgrade of May 2018.We subsequently trimmed our overweight on two occasions,December 2018 and March 2019,as on each occasion we added more money to European cyclicals.Over the past 12 months,Pharma has not only outperformed the European market by 9%,but has also become the largest Level 2 sector in Europe.Figure 1:Pharma has become the largest Level 2 sector in Europe(as a share of market cap)8.0%8.5%9.0%9.5%10.0%10.5%11.0%11.5%12.0%18 months ago12 months agoCurrentEuropean Level 2 sectors,share of total market cap(%)PharmaBanksCapital GoodsSource:Refinitiv,Credit Suisse researchWhy do we downgrade to benchmark?The following factors cause us to downgrade:1.European macro momentum improvingPharma is typically the worst performing sector when European PMIs rise and we now think we are at the trough of European PMIs.We can see that Pharma has discounted a small recovery in PMI new orders to around 48.However,as we show in the Appendix,this would still be consistent with almost no GDP growth.26 April 2019Global Equity Strategy3Figure 2:Pharmaceuticals has one of the highest negative correlations with PMI new orders Figure 3:European Pharma moves inversely with European PMIs-0.60-0.45-0.30-0.150.000.150.300.45Diversified FinancialsMetals&MiningBanksConstruction MaterialsConsumer DurablesRetailingSemiconductorsChemicalsCapital GoodsAutomobilesTransportTechnology HardwareEnergyInsuranceSoftwareCommercial ServicesPulp&PaperFood RetailBeveragesReal estateHotels&LeisureTobaccoMediaHousehold ProductsHealthcare EquipFood ProducersTelecomsUtilitiesPharmaceuticalsEuropean sectors correlation with PMI new orders20253035404550556065-35-155254565200020032007201120152019European pharma price rel market,%chg y/yEuro area PMI manufacturing new orders,rhs,InvertedSource:Refinitiv,Credit Suisse researchSource:Refinitiv,Credit Suisse researchGerman PMI new orders versus inventories are now below their euro crisis troughs and have started to turn.Taiwanese PMI new orders,which are usually coincident to those in Europe,have already turned.Swedish PMI new orders versus inventories,which tend to lead Eurozone PMI new orders by 6 months,have also turned.Figure 4:German manufacturing PMI new orders versus inventories are close to euro crisis troughs,but Taiwanese new orders have already turned Figure 5:Swedish PMI new orders versus inventories have already turned and they lead Eurozone PMIs,on average,by 6 months 3035404550556065-15-10-50510152020042007201020132017German manufacturing PMI neworders-inventoryTaiwanese manufacturing PMInew orders-20-15-10-5051015202530354045505560651999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019Eurozone PMI neworders,6m lagSwedish PMI neworders less inventoriesSource:Refinitiv,Credit Suisse researchSource:Refinitiv,Credit Suisse research26 April 2019Global Equity Strategy4We previously highlighted in our piece on Europe(see Continental Europe to recover:macro and regional implications,15th March)that the three key drags on European growth(one-off factors such as the low level of the Rhine and new auto testing regime,fiscal policy,and China)all reversed at a time when consensus is expecting no recovery in European GDP growth in Q4 last year(when yoy GDP was 1.1%).We continue to expect a European recovery.2.Pharma is the one of the worst performing sectors when the dollar weakensEuropean Pharma is one of the largest dollar earners at 27%of revenue but much closer to half of profits(see Appendix).As a result,we can see that healthcare is one of the worst performing sectors when the dollar weakens as we can see below.Figure 6:European Pharma is one of the key losers from a weaker dollar Figure 7:European Pharmas price relative usually moves inversely with the EURUSD-0.6-0.5-0.4-0.3-0.2-0.10.10.20.30.40.5HC EqptMediaPharmaceuticalsHH&Per PrdFd Stpl RetailCons SvsSW&SvsFd Bev TbRetailingSemisComm SvsTech HWTelecomInsuranceAutosCap GoodsCons DurEnergyMaterialsUtilitiesTransportationReal EstateDiv FinBanks10y correl of Cont Europe L2 sector rel perf(lc terms)with USD TWI10012014016018020022024026028030011.11.21.31.41.51.62008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019EURUSDCont European pharma price rel market inv rhsSource:Refinitiv,Credit Suisse researchSource:Refinitiv,Credit Suisse research26 April 2019Global Equity Strategy5The euro current account surplus is nearly 5%of GDP,above that of the US,and the last time this happened,the euro was c20%overvalued as opposed to the c20%undervaluation that we see today.Thus we believe any rise in Euro macro surprises relative to those of the US,as shown below,will cause the euro to appreciate.Figure 8:The Eurozone current account surplus(as a percentage of GDP)is now 5%of GDP,larger than that of the US,and last time it was at this level,the euro was 20%overvalued on PPP Figure 9:Relative macro momentum points drives the euro/$with a 3 month lead 1%2%3%4%5%6%-30%-20%-10%0%10%20%30%40%20002002200520082010201320162019EUR USD deviation from PPPEur-US current acc balance%of GDP(4Q moving avg),rhs-24-19-14-9-4161116-250-200-150-100-500501001502002008201020122013201520172019Euro area less US macro surprisesEURUSD,6m%chg,3m lagSource:Refinitiv,Credit Suisse researchSource:Refinitiv,Credit Suisse researchThis is also at a time when the investors are short the euro and long the dollar.Figure 10:Investors are short the euro Figure 11:and long the dollar-100%-80%-60%-40%-20%0%20%40%60%80%100%200520082010201320162019Speculative net positions in EUR against dollar as a%of openinterest-60%-40%-20%0%20%40%60%200520082010201320162019US dollar:net speculative positions as a%of open interestSource:Refinitiv,Credit Suisse researchSource:Refinitiv,Credit Suisse research26 April 2019Global Equity Strategy63.The product pipeline is uncertain,and R&D productivity has yet to fully reboundProbability-adjusted new drug approvals are expected to be lower in 2019 than 2018 and R&D productivity has been weak.Figure 12:Probability-adjusted new drug approvals are expected to be lower in 2019 than in 2018Figure 13:European majors R&D productivity has been weak -5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,00020002001200220032004200520062007200820092010201120122013201420152016201720182019E(prob.adj.)2019E(100%prob.)US peak sales by yr of US lch($m,bar)Peak Sales-NDAPeak Sales-s-NDAPeak Sales-BLAPeak Sales-s-BLAPeak Sales-BLA-BSPeak Sales-OtherPeak Sales US Overall0.00.51.01.52.02.519992000200120022003200420052006200720082009201020112012201320142015201620172018CurrentNPV of R&D/7 yrs R&D spendUS large capEU large capGlobalSource:Credit Suisse Pharma teamSource:Credit Suisse Pharma teamLower R&D productivity has also manifested itself in the clear downtrend in asset turns for the sector,reaching its lowest levels in 20 years,even relative to the market.Figure 14:Asset turns on Credit Suisse HOLT continue to decline,even relative to global markets0.480.50.520.540.560.580.69800020406081012141618European Pharma-Asset Turns rel global marketsSource:HOLT,Credit Suisse researchWe believe falling asset turns are a sign often of a business model under distress.A fall in asset turns relative to the market reflects that a business is becoming more capital intensive.For example,this could be because it is simply becoming harder and more expensive to discover blockbusters on the same scale as it used to be(for some of the reasons highlighted below).26 April 2019Global Equity Strategy74.Pricing appears to be weakeningPricing remains under pressure in the US,as shown on our proxy below.We look at CPI and PPI trends in drug prices relative to core CPI and core PPI.Our Pharma team highlight that the price of US generic drugs is down 13%year-on-year and that net drug prices are running as low as 2%compared to closer to 10%over the past decade.In Europe,trends appear to have been more stable,but the US accounts for at least half of global pharma sales.Figure 15:Pharma price increases have dropped relative to general inflation in the US Figure 16:and in Europe-4%-3%-2%-1%0%1%2%3%4%-2%0%2%4%6%8%200020022004200720092011201420162019US pharma PPI relative to core PPI,year-on-year changeUS Drugs CPI relative to core CPI,yoy chg,rhs-7%-5%-3%-1%1%3%200120032005200720102012201420162019Euro pharma PPI relative to core PPI,year-on-year changeAverageSource:Refinitiv,Credit Suisse researchSource:Refinitiv,Credit Suisse research5.There appears to be increasing political risk to the sectorThe fundamental problem in our view remains that branded drugs prices in the US are 50%to 75%above those in Europe at a time when generic prices are below and when the government accounts for 42%of drug purchases(rather than 24%a decade ago).Our Pharma team highlights that if branded drugs prices in the US fell to European levels,then initially profits would halve(before remedial measures were put in place).On both sides of the political spectrum and among the electorate,the risks appear to be mounting against the status quo in the healthcare industry.The current system appears to be financially unsustainable.According to the Congressional Budget Office(the CBO),the cost of major healthcare programs would rise to 9.2%of GDP by 2048 compared to 5.2%of GDP today simply owing to demographics.The most high-profile Democratic candidates have largely aligned on the need to reduce drug prices Senators Warren,Booker,Harris and Gillibrand all co-sponsored a Bernie Sanders-led bill targeting a reduction in drug prices(CNBC,10th Jan)by i)allowing the Health Secretary to negotiate lower Medicare prices;ii)allowing Americans to import lower-priced drugs from abroad;and iii)pegging the price of US prescription drugs to the median price in five major countries(Canada,the UK,France,Germany and Japan).The majority of current Democratic candidates appear to be in favour of either expanding Medicare coverage(by lowering the eligibility age or allowing Americans to voluntarily opt-in)or moving towards a universal/single-payer system.26 April 2019Global Equity Strategy8In his State of the Union speech,President Trump called for the need to deliver greater price transparency to increase competition and lower costs.In particular,he singled out the“unfairness that Americans pay vastly more than people in other countries for the exact same drugs”and called on Congress to“pass legislation that takes on the problem of global freeloading”(NBC,6th Feb).According to some polls,the majority of Americans(70%)support a Medicare-for-all(single-payer)healthcare system,with 85%of Democrats and 52%of Republicans in favour of such a move(CNBC,28th Aug).As we move into the summer and the start of the Democratic primaries in June,we think investors may start to focus on next years presidential election and the potential risks to the Pharma industry,regardless of the outcome.Although opinion polls have proven to be unreliable in recent elections,we note that polls(eg FiveThirtyEight)currently indicate the next election may be tightly contested.We highlight that prior proposals to allow the government to negotiate Medicare drug prices under Obamacare were dropped in 2009 after the US Pharma industry agreed with the White House to contribute$