TheChek News Flow

European earnings forecasts still founder

For the fourth year in a row, consensus expectations for European companies’ earnings growth at the beginning of the year have proved wildly over-optimistic. In the last four weeks, consensus earnings forecasts for Peugeot, Rémy Cointreau and Air France-KLM have all been downgraded, by 40 per cent, 11 per cent and 8 per cent, respectively, according to Bloomberg. The downgrades shed light not just on the inaccuracy of analysts’ forecasts but also on the pressures that are continuing to affect European companies’ profitability. "2014 has started in an eerily similar fashion to the last three: analysts start off the year with 8 to 15 per cent earnings per share expectations, and it ends up at -6 per cent to 1 per cent. Not great," said Nick Nelson, European equity strategist at UBS. Thomson Reuters’ IBES consensus forecasts for European earnings growth in 2014 have moved from 13 per cent at the start of the year to 8 per cent. This mirrors trends in the previous three years, where analysts also reduced their performance expectations sharply over the calendar year. "Earnings revisions for 2014 have been consistently negative," wrote Goldman Sachs’ equity strategy team in a report this week. Despite stock markets having risen significantly – the FTSE Eurofirst is up 11 per cent over the past year – there is still little sign of improving macroeconomic fundamentals in Europe feeding through to companies’ bottom lines. "One of the big concerns investors have is that the market has gone up a lot and yet we are still seeing earnings downgrades," said Graham Secker, head of pan-European equity strategy at Morgan Stanley. A strong euro, wobbles in the emerging markets from Turkey to South Africa, a US swathed in snow, not to mention rising geopolitical tension between Russia and the west over Ukraine all provided reasons for gloom during the first quarter of 2014. But investors should nevertheless take with a pinch of salt the number of companies reporting that they have "beaten" expectations, given that these have fallen so sharply over the quarter. Even so, just over half the 101 companies of the 374 Stoxx600 European companies that have reported so far on their first quarter performance have disappointed consensus earnings expectations, according to Bloomberg. The last four years are not the only examples of analysts being over-bullish. "Going back 25 years, analysts have been too optimistic about earnings growth in 20 years out of the 25 and by 8 percentage points on average over the whole period," said Mr Nelson. Mr Secker argued the demographics of the analyst community provided some explanation for the trend over recent years. "If you are an analyst working at an investment bank in Europe, if you’ve been doing this job for three years or less, you may have never seen an upgrade," he said. "Some of the junior analysts, indeed all analysts, may be underestimating operational leverage on the upside."

Pfizer to Pursue Bid for AstraZeneca Pfizer Inc. PFE +0.13% plans to pursue a bid for AstraZeneca AZN.LN -2.28% PLC, according to people familiar with the matter, eyeing a tie-up that would create a roughly $300 billion pharmaceutical giant and fuel an already booming year for merger-and-acquisition activity, particularly in health care.

An announcement of New York-based Pfizer's intention to pursue a deal for its U.K. rival is imminent, the people said. With AstraZeneca's market capitalization exceeding $85 billion, a deal could easily be valued at more than $100 billion.

A pairing of Pfizer and AstraZeneca would create a company with drugs treating most of the major maladies, including diabetes, heart disease and rheumatoid arthritis. It would combine Pfizer's targeted cancer therapies, such as Xalkori treating a form of lung cancer, with AstraZeneca's promising drug that aims to attack cancer using the body's immune system. The industry considers such immunotherapies to be the next wave of lucrative cancer treatments.

Pfizer's overture represents a renewed effort by the company to make a go at AstraZeneca, as it earlier this year tried to ignite a deal, one of the people said.

The Financial Times earlier reported on Pfizer's intentions.

Pfizer's interest comes during a rush of deal making, particularly in health care. Last week, announced deal volume world-wide crossed $1 trillion for this year. That made this the fourth-quickest year to cross the trillion-dollar mark and the fastest since 2007, according to data provider Dealogic.

Just last week, Valeant Pharmaceuticals International Inc. announced its offer to buy rival Allergan Inc. for nearly $46 billion, while Novartis AG sealed more than $20 billion in deals to sell and exchange businesses with GlaxoSmithKline PLC and Eli Lilly & Co.

Pfizer is one of the industry's biggest deal makers, and a takeover of AstraZeneca could mark its largest deal since it bought Warner-Lambert for $90 billion in 2000. Pfizer would be hoping that by linking with AstraZeneca the companies together could better overcome each firm's loss of billions of dollars in sales from expiring blockbusters and return to the heady growth they saw a decade ago. But at their current sizes, each company has found it difficult to find new products to drive significant growth.

In acquiring AstraZeneca, Pfizer could deploy its cash pile overseas. The company has been trying to find a use for its overseas cash because bringing it back to the U.S. would mean a hefty tax bill.

But both companies are losing revenue, not growing. Each company's revenue fell 6% last year; Pfizer had $51.6 billion in 2013 sales, while AstraZeneca notched $25.7 billion. And each is facing the loss of billions of dollars in additional sales over the next few years as more aging products lose patent protection.

AstraZeneca alone is staring at losing $12.3 billion in sales from existing products by 2022, according to ISI Group analyst Mark Schoenebaum. Pfizer's Celebrex painkiller, which generated $798 million in sales last year, could start facing generic competition by the end of this year.

The fact that both Pfizer and AstraZeneca, each the product of megamergers, are still coping with aging pipelines suggests that such big deals may provide an opportunity to cut costs but don't always propel growth long term.

Although showing promise, their pipelines of drugs in development are risky. And even when the companies have won approval for promising new drugs in recent years, the results have sometimes not met Wall Street's expectations.

AstraZeneca's Brilinta heart-attack drug was expected to tally more than $2 billion in yearly sales, but last year it recorded just $283 million in sales. Two of Pfizer's new drugs, Xeljanz and Eliquis, had rocky starts. Both companies have said the drugs are progressing and they are still counting on them for significant growth.

Last week, after London's Sunday Times first reported on the earlier interest of Pfizer, AstraZeneca CEO Pascal Soriot sidestepped questions regarding a potential hook-up between the two companies. But he spoke negatively about big deals generally. "Large mergers and acquisitions sometimes work, but they are often very disruptive, so we are better focusing on what we do well and partnering where it makes sense," he said on an earnings call.

"We focus ourselves on doing our job as best we can and developing new medicines for patients," Mr. Soriot said during the call. "Hopefully we will be successful in doing this, and our share price will reflect this. That is the best way for us to remain an independent company."

A Pfizer takeover of AstraZeneca would be one of the biggest-ever foreign purchases of a British company. Adding to the challenges facing the U.S. company in its effort to pull off the deal, under U.K. takeover rules, Pfizer could be forced to come up with a fully financed, formal bid for AstraZeneca in a relatively narrow time frame, or walk away. That could be a tall order given the sheer size of AstraZeneca and the amount of cash or stock—or combination of the two—such a bid would require. It's not clear how much of that groundwork Pfizer has already laid, however, given that it has had the British company in its sights for some time.

After taking the helm of AstraZeneca in October 2012, Mr. Soriot has been trying to prepare the company to move past the loss of top-selling products including schizophrenia treatment Seroquel and heartburn remedy Nexium.

Mr. Soriot, a former chief operating officer at Roche AG, has cut costs at AstraZeneca, laying off thousands of employees, and tried to replenish the company's drug pipeline by doing small deals to bring in promising new treatments for cancer, diabetes and heart and inflammatory diseases. The stock is up about 33% over the last year, handily outpacing the broader market.

Pfizer CEO Ian Read, who took charge of Pfizer in 2010, has also cut costs at the company and shed its infant-formula and animal-health businesses to focus on prescription drugs for humans. He has divided the company into three businesses in a bid to get its parts growing faster and potentially break them apart. Pfizer shares over the last year are up a couple percent.

Pfizer renews bid interest in AstraZeneca

Pfizer, the US pharmaceuticals group, has renewed its interest in a takeover of UK rival AstraZeneca, in what would be one of the global drugs industry’s largest ever deals. The US group approached AstraZeneca, which has a market value of £51.5bn ($86.6bn), within the last week and could make a public declaration of its interest in a takeover as early as this week, said people familiar with the matter. Going public would be a move designed to put pressure on AstraZeneca’s board to engage in discussions. Pfizer first telegraphed its interest four months ago, when it asked the UK group to consider a takeover. The overture was rebuffed, however, and no formal talks took place. The exact value Pfizer is placing on AstraZeneca could not be ascertained, but people familiar with the matter said a bid would be likely to come in at more than $100bn. This would make it the biggest pharma deal since Pfizer’s $111.8bn takeover of Warner-Lambert in 2000. People close to the situation cautioned that there was no guarantee of a public declaration by Pfizer. The move comes at a time of renewed corporate activity in the sector as drugmakers look to deploy large cash piles and cheap debt to strengthen their positions in an increasingly competitive market. A takeover of AstraZeneca would be easily the biggest foreign acquisition of a British company. UK politicians have raised concern over the implications for jobs and investment since news of Pfizer’s earlier tentative interest emerged last week. AstraZeneca is at the heart of Britain’s life-science sector, employing about 7,000 people in the country and accounting for more than 2 per cent of exported goods. Pascal Soriot, AstraZeneca chief executive, last week set out plans for the possible sale or spin-off of non-core assets worth up to $15bn in an apparent attempt to shore up investor support for his turnround efforts after years of falling sales. Shares in the company have climbed a quarter over the past six months amid rising optimism over its strengthening innovation pipeline. Analysts cite AstraZeneca’s growing potential in high-value cancer drugs as one of the main attractions for Pfizer. The US company’s desire to find a tax-efficient outlet for tens of billions of dollars in offshore cash is widely seen as another motivation. Pfizer and AstraZeneca declined to comment. Mergers and acquisitions in the healthcare sector have picked up over the past year. Activity intensified last week when Valeant and the activist investor Bill Ackman teamed up to launch a $45bn unsolicited bid for Allergan, the maker of Botox, while GlaxoSmithKline and Novartis agreed a $20bn asset swap. US drugmaker Mylan launched a fresh $9bn bid for Sweden’s Meda and Zimmer agreed to acquire rival medical products maker Biomet for $13.4bn. Reckitt Benckiser of the UK, meanwhile, is among the contenders to buy the consumer healthcare business being auctioned by Merck & Co for up to $14bn. The value of healthcare deals is at more than $150bn globally for the year to date, according to data from Dealogic. The surge has helped push the overall M&A market above the $1tn mark – the first time since 2007 that it has reached that level by this point in the year. Addressing reporters last week, Mr Soriot refused to discuss the Pfizer speculation but said AstraZeneca remained "extremely committed" to the UK, where it is building a big new research and development centre in Cambridge. He also highlighted the risks involved in big mergers. "Large acquisitions sometimes can work but sometimes they are very disruptive so I think we are better off focusing on what we do well and partnering in other areas," he said.