Event
We have initiated coverage of five European Pharmaceutical
companies today with an Overweight recommendation on the
sector. We have initiated Roche and GlaxoSmithKline with BUY
ratings. AstraZeneca and Novartis are initiated on HOLD ratings.
Sanofi-aventis is our least favourite stock with an
UNDERPERFORM rating.
Key Points
• A dim light in a dark world: Despite the industry's significant
fundamental issues surrounding a tsunami of patent expiries, a
worsening political and pricing environment in the United States
and poor R&D productivity, it is pragmatism regarding the dire
fundamentals of the wider economy, rather than optimism for
the industry, that leads us to this positive sector stance.
However, our Overweight recommendation on the sector (and
the BUY rating on GlaxoSmithKline) comes with strong caveats
that we could see a sustained wave of counter-rotation into
pro-cyclical sectors at some point during 2009.
• Roche (BUY, PT SFr196): Roche is our top pick amongst the
European Pharmaceutical Majors, with superior revenue and
earnings growth versus its peers. Furthermore we see
significant upside asymmetry in our estimates as they do not
include any contribution from adjuvant use of Avastin or the
acquisition of Genentech, though both are strong possibilities in
2009. Valuation looks very attractive to us with Roche currently
trading on a similar multiple to Novartis, yet offering more than
double the earnings growth on a five-year view.
• GlaxoSmithKline (BUY, PT £13.70): We see GSK as a good
hedge against a deteriorating UK economy and Sterling
weakness. We believe the company has seen the worst of its
exposure to generics and has already seen sentiment over the
prospects for its pipeline reach a floor. A strong balance sheet
and quarterly cash dividends which prospectively yield circa 5%
should see it keep most of its fans in the near term, at least.
• AstraZeneca (HOLD, PT £29.00): AstraZeneca faces earnings
pressure from a steady stream of patent expiries through our
forecast period despite a resurgent Crestor. Strong guidance
and further clarity on mid term cost savings may be required to
support the shares through the year in our view. However, the
current 2010E PE of 7.0x does not look too demanding.
• Novartis (HOLD, PT SFr52): Novartis appears fair value on a
12-month view, though we see potential for downgrades to an
over-inflated consensus for 2009 earnings due to wild 4Q 2008
currency gyrations following the full-year results.
• Sanofi-aventis (UNDERPERFORM, PT 41): Our rating on
Sanofi-aventis reflects the clear and present danger of Lovenox
generics in the US as well as a number of other fundamental
issues including a significant ownership overhang (Total,
L'Oreal), heavy patent expiry schedule and our low
expectations for the pipeline (Multaq, eplivanserin and
saredutant).

Table of Contents
Initiation of Coverage
Executive Summary: 2009 – A tale of two halves? ..................................................................................................... 5
Initiating Coverage with an Overweight recommendation on the sector, but may be short-lived ............................... 6
Macroeconomic Backdrop........................................................................................................................................ 12
Pharmaceuticals in 2009 – Still a relatively safe haven, but rotation threat looms ................................................... 18
“4P” Industry Pressures Intensifying in 2009–2013................................................................................................... 21
Industry Response – Diversification, Financial Engineering and R&D Rationalisation............................................. 23
AstraZeneca ............................................................................................................................................................. 31
GlaxoSmithKline Plc.................................................................................................................................................. 65
Novartis AG.............................................................................................................................................................. 111
Roche Holding AG ..................................................................................................................................................147
Sanofi-Aventis..........................................................................................................................................................187