EURO UPDATE:Despite Bumper Year, Small Pharma Stks Have Room To Rise
By ANGELA CULLEN Of DOW JONES NEWSWIRES
FRANKFURT -- After years spent in the shadows of the world's big pharmaceutical companies, small and mid-cap drug stocks came of age in 2000. Although now pricey, observers reckon these stocks still have room to rise.
In a market where investors have sought sanctuary from global market jitters, small and mid-sized pharmaceuticals have benefited the most, offering safety and strong growth - better even than the world's big-name drug companies which are struggling with high research costs and a paucity of up-and-coming blockbusters.
Despite strong gains already, observers reckon stocks like Germany's Altana AG (G.ALT) and Britain's Shire Pharmaceuticals PLC (SHPGY) haven't completely run out of puff.
"We're not overly bullish, but we do believe that pharmaceuticals are still a solid, growth sector and a safe haven," said Andreas Schmidt, analyst at Merrill Lynch in Frankfurt.
"Now we have to proceed very selectively," said Schmidt.
Max Herrmann and Sally Bennett, analysts at ING Barings Charterhouse in London, said specialty pharmaceutical companies look poised to deliver excellent returns going forward.
"Over the next five years, the specialty pharmaceutical companies should deliver earnings growth of around 27% per annum, more than double the growth expected from the large pharmaceutical companies," Herrmann and Bennett said in a research note.
Because of this, big pharma is looking to second-tier companies and biotech firms for valuable pipelines.
Take Germany's BASF AG (G.BAS). The high price it negotiated for itself in last week's sale of its pint-sized pharmaceuticals unit to Abbott Laboratories (ABT) shows how highly the industry values these small R&D operations.
BASF's human antibody-based rheumatoid arthritis drug won't hit the market until 2003 at best, but Abbott still forked out a generous $6.9 billion for a company with only EUR2.5 billion in annual sales and a below-average profit return.
The share prices of second-tier drugs groups reflect the value investors see in these pipelines.
Against an 8% slide on Germany's DAX 30 index since Jan. 1 and a modest 14% gain on the MDAX mid-cap index, Altana shares rose 130% in the same period, Shire shares gained 67% and Ireland's Elan Corp PLC (ELN) rallied 96%.
Add in Germany's Schering AG (G.SCH), up 54%, and Merck KGaA (G.MRK), up 47%.
U.K. groups Bioglan Pharma PLC (U.BIP) and Galen Holdings PLC (U.GLN) also offer long-term value, said ING Barings analysts Herrmann and Bennett.
In contrast, shares of larger rivals Glaxo Wellcome PLC (GLX) and SmithKline Beecham PLC (SBH) are only marginally higher than where they started the year.
And although AstraZeneca PLC (AZN) has gained strongly this year, it must yet negotiate the patent expiry on key blockbuster Losec. Patent expiries also threaten others in the big pharma league going forward, hence the attraction of the more insulated second-tier companies.
Sure, it looks a good time to cash in some gains - Lehman Brothers is reducing its exposure because many healthcare stocks "are looking stretched" - but experts reckon continued selective buying still offers rewards. The rally's not over yet.
Altana, Shire Still Offer Upside
Although Klaus Niedermeier, analyst at BHF Trust Bank in Frankfurt, believes Altana has peaked, Merrill's Schmidt reckons the stock can go well above EUR200 in the next 12 to 15 months.
At 1310 GMT Wednesday, Altana shares were up 0.2% at EUR155.80.
SG Cowen analyst Peter Laing is also bullish on the Altana, a drugs-to-chemicals group focused on respiratory and digestive tract diseases.
With nine products in late stage clinical development, Altana has a well-filled R&D pipeline for its size, and Laing is upbeat on its new inhaled steroid to treat asthma, due to be filed for regulatory approval in 2001, and its Roflumilast tablet inhibitor against asthma, to be filed in 2002. Altana expects peak sales of more than EUR500 million from this product.
Altana could also revive its interest in Degussa-Huels AG's (G.DHA) Asta Medica AG drugs subsidiary now that Degussa-Huels has restructured the business, said BHF's Niedermeier.
Talks between Degussa-Huels and Altana broke down earlier this year over price and certain areas of the business that Altana didn't want. If Degussa-Huels is prepared to sell Asta Medica in parts, Altana may well return to the bidding table in search of Asta's oncology pipeline, said Niedermeier.
While he's neutral on Schering and Merck's mid-term growth prospects, Schmidt has long-term buy ratings on the stocks, saying investors need more proof that their strategies are on track.
Schering is attractive below a price of EUR60, but the stock is likely to be subdued over the next few months, he said. Schering shares were down 0.2% at EUR61.66.
Merck KGaA is developing a strong R&D pipeline through various alliances, but its best-selling product, Glucophage, used to treat diabetes, is facing generic competition in the coming years.
"We need to wait and see how Glucophage develops when generic versions hit the market," said Schmidt.
Merck shares were up 0.6% at EUR46.60.
Since unveiling its $4bn merger with Canada's BioChem Pharma Inc (BCHE) two weeks ago, Shire Pharmaceutical shares have gone into decline.
Although some analysts have concerns about the deal, such as BioChem's questionable performance to date, Shire remains something of a favorite in the investment community.
Lehman Brothers has lowered its price target on Shire to 1,400 pence from 1,500 pence due to uncertainty about how the company's future earnings will be affected by the merger. Still, that implies at least 30% upside. Shire shares were up 28 pence, or 2.8%, at 1,048 pence.
While the new company is a relatively low risk investment option - having diluted its dependance on lead hyperactivity drug Adderall via the BioChem deal and last year's acquisition of U.S. group Roberts Pharmaceuticals - its larger size means it will also have to develop more products to sustain growth rates, analyst Johanna Walton said in a recent report.
Having achieved its growth through its focus on the GBP6 billion dermatology market, Bioglan is now looking to pain management to maintain earnings momentum.
Galen, whose focus is female healthcare, has acquired one of the largest U.S. salesforces in this field through a recent acquisition. It will use this to market its intravaginal-ring hormone-replacement therapy.
ING rates Bioglan a buy and Galen a hold - arguing the stock has already rallied nicely. Still, Herrmann and Bennett said they remain enthusiastic about Galen's strategy.
-By Angela Cullen, Dow Jones Newswires; 49 69 2972 5500; angela.cullen@dowjones.com
Peter, thanks for the abstract from JAMA.
Jim |
