Risk/reward looks favourable post Trump election and the sector de-rating, justifying our upgrade to Attractive. US
pricing pressure is better factored in, M&A and pipelines look supportive again. Prefer Roche, Shire, Sanofi in Large Pharma; Hikma, Ipsen in Specialty Pharma.
Upgrade Pharma to Attractive, well positioned among defensives.
Our strategists favour financials but consider EU Pharma is well placed among defensives, and rate the sector Overweight. A sharp de-rating over the past 12 months has left the sector trading at a 2% P/E discount to the market, far from its historical average premium of 15% where it was a year ago. We believe this is undervalued in the context of the sector's 2017-20e CAGR of 5% for sales and 10% for EPS and attractive yields (4% dividend, 7% FCF). Our 14% weighted
average upside for the sector is above our strategists' MSCI Europe 8% upside target for 2017.
EU Large Pharma: we are buyers of Roche, Shire, Sanofi, AstraZeneca and sellers of Novartis.
We upgrade Sanofi to Overweight (turnaround, M&A), now a top pick with Shire (execution) and Roche (pipeline upside), and remain buyers of AstraZeneca (pipeline upside). We remain Equal-weight on GSK (self-help and dividend vs HIV competition) and Novo Nordisk (remaining US pricing risks). We keep Novartis at Underweight (high consensus expectations on Entresto, Alcon, challenging corporate strategy).
EU Specialty Pharma: we are buyers of Hikma and Ipsen.
We like Hikma (generic pipeline upside) and Ipsen (ongoing launches and margin upside). We downgrade UCB to Equal weight (limited short-term upside) and also Indivior (fewer catalysts). We remain Equal-weight on Merck KGaA (non-pharma upside to kick in 2H17) and Actelion (limited upside in 2017 offset by the recent J&J approach).