It will take more than tax breaks to make PfizerZeneca work
It needs cost cuts and firing research scientists is politically contentious
Six months ago, hardly a single analyst had anything positive to say about AstraZeneca. The company had no ideas worth pursuing, its existing drugs were running out of patent protection, and profits were falling.
There was the added risk that the beleaguered management would panic and squander the company’s cash on an ill-judged acquisition. The shares were not worth buying at £30 apiece.
Now Pfizer believes they are worth more than half as much again, and suddenly the scales have fallen from the experts’ eyes. Those drugs for cancer and diabetes are so valuable that a bidder will have to pay even more than the $100bn that Pfizer appears to be offering to win control of a British national treasure.
This is not quite fair to the analysts. Pfizer’s maths is driven as much by tax considerations as an appreciation of Astra’s drugs. Like dozens of other US companies, Pfizer has money offshore - $30bn which will be taxed at 38 per cent if it is taken back home - while new rules dictate that profits from patents here are taxed at just 10 per cent. This combination transforms the bid sums, and this week the analysts have been applying the new maths to all sorts of fantasy combinations of drug companies.
However, it will take more than tax maths to make PfizerZeneca work. It needs cost cuts, and while few would weep at the loss of jobs in sales and marketing, firing the scientists who do the research is politically contentious. It is only two years since Pfizer shut its British research facility in Kent, and Astra itself has just sold its Cheshire research centre.
Across the industry, research is producing results; the 10-year survival rate for cancer in Britain has doubled to 50 per cent in the past 20 years. But much of the progress comes from smaller companies, which appear to be more productive. Big pharma, for all its billions of resources, is not that good at finding new treatments, as Astra’s chairman almost admitted this week.
It is good at finding ways to protect and extend patents. Yet a 2012 study for the Federal Reserve Bank of St Louis found that patents retard innovation and productivity. This is unlikely to bother the UK government, but should PfizerZeneca actually happen, re-domiciled and expanding in Britain, it will face growing hostility back where it used to call home.
Skip off
So farewell, then, Hugh “Skip” McGee III. He has left Barclays, prompting some to worry that his departure might trigger an exodus of other former Lehman Brothers executives. Well, perhaps, always assuming there are some left. Larry Weiseneck, co-head of securities, has already gone, along with Jerry Donini, “who left after he was promoted to chief operating officer of the investment banking unit”, as my colleagues Camilla Hall and Tom Braithwaite so elegantly put it.
Mr McGee has a record best described as mixed, at least as far as his employers are concerned. He is said to be “hard-driving” and “intense”, with an appetite for high-risk mega-deals and a demand that subordinates arrive early enough to brief him over breakfast. In short, he is the New York investment banker’s investment banker.
He was never going to get CEO Antony Jenkins’ new holier-than-thou Barclays. Yet last year he was promoted to head of the bank in America, a move that a cursory reading of his CV might have suggested would end in tears. And so it has, for Mr Jenkins. It is particularly unfortunate so soon after his chairman made such an effort to explain to the shareholders last week how necessary it was to force-feed such people with gold to prevent them jumping ship.
Mr McGee was Barclays’ highest-paid executive last year, collecting $15m in shares from deferred bonus schemes, and now he has demonstrated his loyalty in the only way these bankers know.
Robert Pickering, who as the one-time head of JP Morgan Cazenove has some experience in dealing with the oversized egos of dealmakers, wrote a letter to the FT this week: “It is possible that Mr Jenkins will prove his doubters wrong and come out on top, but from my armchair it looks an unequal fight and my money would be on the investment bankers.”
To prevent Géant from becoming the cheapest banner in France, Leclerc cut its prices a few weeks ago. We doubt the other retailers, especially Carrefour, can afford to see an increase in the price gap with Leclerc. Carrefour needs to react even at the expense of short-term margins (2014) as most of the savings from Caravelle will not materialise until 2015. We downgrade from Buy to Hold with a new TP of EUR29.5.
* From zone pricing to national pricing
We have gathered more evidence over the past two weeks that Leclerc has been reacting to Géant at national level (pricing is rather centralised at Leclerc) in order to protect its price leadership and prevent Géant (which is preparing a national advertising campaign for end-May) from presenting itself as the cheapest banner in France. While the other French retailers are reacting on a local basis, Leclerc has a national response given its pricing structure.
* Short-term pain ahead…
Carrefour will need to cut prices by more than we thought, already this
year. It may find it difficult to do this and increase EBIT margin at the same
time, given that the EUR243m savings we estimate from Caravelle will
mainly materialise in 2015. As a result, we cut our French EBIT margin and
now expect a 15bps YOY decline for 2014 versus +8bps before.
* …but we take Plassat’s word
Carrefour has a long history of stop-and-go in prices. Moreover, its price
index has been fairly stable lately, whereas Auchan has cut its prices.
Georges Plassat emphasised at the shareholders’ meeting that the group
wouldn’t compromise on price for the sake of short-term profitability. We
take his word. We see this as the best strategy short-term, as we doubt
efforts on marketing will be enough.
* We expect EBIT of EUR2,269m this year, 5% below consensus
We think Spain should help this year, but not enough to offset further
price investment in France. We expect no support from Italy. Carrefour’s
long-term recovery story remains intact, and we have been buyers since
May 2012, but the focus on French profitability is unlikely to prevent the
company from being competitive on price. If the price war between Géant
and Leclerc were to calm down, we would be ready to review our stance
on the stock.
Find Attached a monitor with main companies that reported today in europe.
Jsut open it - check pre-mkt indication in Theor PX col.
Laurent
US MArket Closed almost flat with Small caps lagging, consumer discretionary (+0.4%) and utilities (+0.3%) outperformed throughout the session, with the utilities sector extending its 2014 advance to 14.0%, the discretionary sector was boosted by media names amid reports indicating AT&T (T 35.58, -0.12) approached DirecTV (DTV 80.76, +3.16) about a potential $40 billion acquisition...volume were below average @682mil shares..VIX @13.25 -1.19%...Kraft reported after closed stock-0.7%, LNKD -4.4% after H. on earnings, Unemployment rate in Japan remained steady inv March at its 6-year low of 3.6%, prompting Chief Cabinet Sec Suga to remarkvthat labor situation is steadily improving. Separately, local press indicatedvJapan govt will consider a corporate tax cut from FY15/16, in line with recentvremarks from cabinet officials. Sony opened on lows after cutting guidance but recover during session...Ukraine attacked on pro-russian rebels put some pressure on mkt...Nikkei -0.27%...Hang Seng +0.66%...Shanghai +0.30%
Eur$1.3857 S&P Fut +0.04% European fut. +0.20%
Keep an eye on :
- AF FP : Air France SNPL Union Wants End to Pilot Strike Threat: Echos
- AZN LN : Pfizer said to be considering raising offer for the company to higher than £63B ($106B), with an increased cash component - press- Reminder: on 4/28 Pfizer made a preliminary and conditional proposal regarding a possible offer for AstraZeneca. The Proposal comprised £13.98 in cash (30%) and 1.758 Pfizer shares (70%) per AstraZeneca share, representing a value of £46.61 per AstraZeneca share, based on the closing price of Pfizer shares of $30.52 on 3 January 2014.--> AZN @ in NY
- AZN LN : Astra, Pfizer deal could face Chinese antitrust hurdle - RTR
- BAS GY : BASF 1Q Ebit Ex-Items EU2.14b, Est. EU2.12b; Confirms 2014 Goal Despite Unfavorable FX Development
- BAYN GY : Bayer Said to Be in Exclusive Talks For Merck Consumer Unit
- CAP FP : Cap Gemini Offers Attractive Entry Point: Citi; Upgrades Stock
- ELE SM : Endesa Says Enersis to Buy Inkia's 39% Stake in Generandes Peru
- GKP LN : Gulf Keystone Denies Report on Plans to Oust Kozel: Reuters Link
- GN DC : GN Store Nord 1Q Net Misses Est.; Outlook Unchanged
- NOVN VX : Novartis Abandons Plans to Acquire Gamida Cell: Globes Link
- PUB FP : Omnicom/Publicis Deal Shows Signs of 'Trouble'
- REP SM : Pemex considering selling its 9.5% stake in REP - Expansion
- RI FP : Pernod Ricard Says Not Seeking More U.S. Assets at This Time - Treasury Wine Says Not In Talks With Pernod
- SIE GY : Siemens held lengthy board debate on bid for Alstom power division - Frankfurter Allgemeine Zeitung
- SOW GY : Software AG 1Q Sales Miss, Ebit, EPS Beat; Confirms 2014 Outlook
- SRP LN : Serco Says Invesco Cut Stake to 11% (from 22% on March 3 and 14,3% on April 28)
- SYV SM : Sacyr Plans Capital Increase for Testa Real Estate Unit
- TEF SM : Telefonica Sweetens Offer to Win EU OK for E-Plus: Reuters Link
- TEMN SW : Temenos Offers Limited Upside, UBS Says; Downgrades Stock
- TEN IM : Tenaris 1Q Net Beats Est.; Rev. Misses
- USG NA : USG People Reports 1Q Net Income of EU6.78m vs Loss of EU16.8m
>>> Up
*ARSEUS RAISED TO BUY FROM HOLD AT ING
*BOUYGUES RAISED TO OVERWEIGHT VS NEUTRAL AT JPMORGAN
*CAP GEMINI RAISED TO BUY VS NEUTRAL AT CITI
*DIXONS RETAIL RAISED TO BUY VS NEUTRAL AT BOFAML
*EMLAK KONUT RAISED TO OVERWEIGHT VS NEUTRAL AT JPMORGAN
*GDF SUEZ RAISED TO BUY VS NEUTRAL AT UBS
*IBERDROLA RAISED TO BUY VS NEUTRAL AT UBS
*NOVARTIS RAISED TO BUY FROM HOLD AT JEFFERIES
*ORANGE RAISED TO NEUTRAL VS UNDERWEIGHT AT JPMORGAN
*OUTOKUMPU RAISED TO CONVICTION BUY VS NEUTRAL AT GOLDMAN
*RESOLUTION RAISED TO NEUTRAL VS UNDERPERFORM AT CREDIT SUISSE
*SAFILO RAISED TO OUTPERFORM VS NEUTRAL AT MEDIOBANCA
*SONGBIRD ESTATE RAISED TO OVERWEIGHT VS NEUTRAL AT JPMORGAN
*TALKTALK RAISED TO HOLD VS SELL AT BERENBERG
*TAYLOR WIMPEY RAISED TO BUY AT CITI ON VALUATION
*REDROW RAISED TO BUY AT CITI ON VALUATION
*WACKER CHEMIE RAISED TO HOLD VS SELL AT BANKHAUS LAMPE
>>> Down
*BNP PARIBAS CUT TO NEUTRAL VS OUTPERFORM AT CREDIT SUISSE
*BRITVIC CUT TO EQUALWEIGHT VS OVERWEIGHT AT BARCLAYS
*CONWERT AG CUT TO UNDERWEIGHT VS NEUTRAL AT JPMORGAN
*GALENICA CUT TO UNDERPERFORM FROM HOLD AT JEFFERIES
*GO AHEAD CUT TO NEUTRAL VS BUY AT CITI
*MERCK KGAA CUT TO NEUTRAL VS BUY AT UBS
*MORRISON CUT TO UNDERWEIGHT VS EQUALWEIGHT AT BARCLAYS
*MR PRICE CUT TO NEUTRAL VS BUY AT BOFAML
*PSP SWISS PROPERTY CUT TO UNDERWEIGHT VS NEUTRAL AT JPMORGAN
*SANTAM CUT TO NEUTRAL VS BUY AT UBS
*SHOPRITE CUT TO NEUTRAL VS BUY AT BOFAML
*TEMENOS CUT TO NEUTRAL VS BUY AT UBS
>>> PT Changes
*ARSEUS PT RAISED TO EU47 FROM EU36 AT ING
*ENEL PT RAISED TO EU4.9 VS EU4.25 AT UBS; KEPT AT BUY
*Enel Green Power PT Raised 9% to EU2.4 at Barclays
*MEDIASET PT CUT TO EU4.3 VS EU4.5 AT UBS; KEPT AT BUY
*Recordati PT Raised to EU13 vs EU11.6 at BofAML
*TESSENDERLO PT RAISED TO EU21 FROM EU20 AT ING
>>> Initiation
*GRAND CITY PROPERTIES RATED NEW OVERWEIGHT AT JPMORGAN, SET AT EU9.75 AT JPMORGAN
>>> Call
>> Stock
*APERAM REMOVED FROM CONVICTION BUY LIST AT GOLDMAN; STILL BUY
BoE warns that housing bubble risks derailing economy
The Bank of England has given its strongest warning yet that a housing bubble threatens to derail the UK economy, saying that spiralling property prices were “the very brightest [hazard] light” on its dashboard.
In a speech in London on Thursday evening, Sir Jon Cunliffe, deputy governor, said the danger signs resembled “a movie that has been seen more than once in the UK”.
His speech came after figures from the Nationwide Building Society showed house prices rose at a double-digit 10.9 per cent annual rate in April, sending the pound to a five-year high against the US dollar and intensifying expectations of earlier interest rate rises.
Sir Jon has kept his views on the economy and the housing market private since joining the BoE last November, but as the head of financial stability he has an influential role in the bank’s policy making.
Noting that house building was still lagging far behind demand for property, he said, “there is good reason to believe that a mutually reinforcing combination of strong demand, weak supply and expectations of a rising market could lead to a period of sustained and very powerful pressure on house prices in the UK”.
Making clear that this time the BoE would not stand by as prices rose, he added, “it would be dangerous to ignore the momentum that has built up in the UK housing market since the spring of last year”.
The June meeting of the Financial Policy Committee, on which Sir Jon sits, will mark a test of the UK’s unproven new framework, which aims to use financial regulation to curb booms and busts.
The FPC has a range of levers it can pull to calm the market down. It can recommend a tightening of underwriting standards in the mortgage lending market, which is already subject to a new regulatory regime aimed at ensuring borrowers can afford to pay off their loans.
Alternatively, it could recommend that the Treasury pares back the generosity of its Help to Buy scheme, which guarantees mortgages to homebuyers with small deposits.
The Committee can also force banks to hold more capital against their mortgage lending, in the hope that this will make them more resilient if there is a subsequent property downturn.
A more extreme measure would be to recommend that a cap is imposed on the ratio of mortgages relative to a home’s value or an individual’s income.
This, however, is seen as politically charged turf in the BoE, and it has previously shied away from demanding formal legal powers to impose these ceilings.
Sir Jon also made it clear that households must accept that interest rates will need to rise “once the recovery is well established”, a condition that has arguably already been met.
“It is particularly important at present to ensure that the current low levels of interest rates do not mask the likely cost of mortgages and so create more headroom for prices to rise,” he said.
Expectations of earlier interest rate rises intensified in the City even before Sir Jon’s speech after strong economic data underscored the pace of the recovery and investors viewed the UK as the destination for their money.
Market expectations now predict the first British rate rise in February or March next year, significantly earlier than the consensus of May that was priced in three months ago.
The British government now also has to pay considerably more to borrow in sterling than many eurozone economies. The difference between government borrowing costs for the UK and Germany have reached a level not seen since the eurozone was created.
“The market is starting to directly challenge the Bank of England’s forward guidance policy,” said Steven Major, global head of fixed income research at HSBC. “Stronger data on average earnings, unemployment and manufacturing activity have resulted in consensus opinion among investors that the Bank of England will put interest rates up next year.”
The strong economy and expectations of higher interest rates has fuelled financial flows into Britain, pushing up the exchange rate.
The pound has climbed around 10 per cent on a trade-weighted basis and 11 per cent against the dollar since last July – the strongest performance among major developed country currencies over that period – although it remains well below the peaks reached before the financial crisis.
Its recent bounce is also in part a function of growing uncertainty about the speed of the US recovery – with the UK’s first-quarter growth spurt in stark contrast with the sputtering performance of the US. Neil Mellor, currency strategist at BNY Mellon, said the pound could “catapult higher” if it broke through a level of 1.70 to the dollar.
The strength of the recovery and market reaction challenges the mood music from the Bank of England, which has remained dovish. Members of the Monetary Policy Committee have stressed the lack of urgency to raise interest rates, that any move upward would be gradual and that rates are unlikely to move back to normal levels of around 5 per cent.
The BoE will produce new forecasts this month and will formally adopt new guidance, linking interest rates to “slack” in the economy, which it is likely to see as falling alongside lower unemployment and underemployment.
“They need to hike rates and they need the pound to go up to prevent the housing market going into a bubble”, said James Kwok, head of currency at Amundi Asset Management, who thinks Asian property investors still see sterling as cheap compared with 2007 levels when they buy in London.