Pharmaceuticals & Biotechnology - Canaccord Genuity Quest

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All Collins Stewart Large Cap research is independent Investment Research. Quest
www.csquest.com
is Collins Stewart's proprietar
y valuation and screening tool. Please see disclaimer for further information
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www.collinsstewart.com
S
Pharmaceuticals & Biotechnology
16 March 2011
Contact
Emmanuel Papadakis PhD CFA
+44 20 7523 8416
EPapadakis@collinsstewart.com
Updating valuations and CS Quest
Updated valuations and adjusted Quest highlight the upside
Having been sector-neutral for some time we think current levels look
attractive given the last 6-month
s ~10% underperformance/
uncertain macro
outlook (eg. imminently post-QE2).
Most names have significant upside on
NPV/adj.QVPS whilst multiples look
increasingly undemanding (
11E sector
PE ~9x) and implied outlook excessively bearish.
In particular we highlight
Novartis (Buy) where current levels represent
an extremely attractive entry
point. Bayer (Buy) remains our top pick for both absolute upside and
as a
pure alpha
story (ie independent of sector sentiment). GSK
(Buy) remains
preferred over Hold-rated
Roche and Sanofi, whilst acknowledging all look
cheap at current levels.
We retain our Sell on Novo despite limited conviction
of near-term correction. CS view on Shire (Hold) will be updated shortly.
Bayer still top-pick, newsflow to start building, NPV/PT
77 unch.
There are few changes to our post-Q4 model. Bayer remains our top sector-
pick, with the story to date unfolding positively as per September
s upgrade
.
Post a recent lull newsflow should rebuild
with tomorrow
s investor seminar
and imminent Xarelto MAGELLAN data at ACC (2-5/4)
ahead of the
summer
s US decision on surgical use (~October for stroke prevention)
.
Management rhetoric aside,
we still believe an exit from MatSci is inevitable
and will unlock significant value from the current conglomerate structure.
Swiss names under pressure, Novartis entry opportunity in focus
The CHF hitting daily highs has compounded pressured situations for
both
Roche (sentiment) and Novartis (buyback suspension).
Regardless, current
weakness looks excessive; Novartis remains preferred and current levels
are compelling, with a bounce looking due post-Q1
s (19/4)/
subsequent
buyback re-initiation. Roche looks too cheap but being a CHF reporter
hasn
t
helped the post-Q4 sentiment capitulation/mixed
11E catalyst outlook.
Updating Novo for latest competitor assistance, Sanofi still a Hold
Novo
s is the only model published here
to see a significant change (+10%
to Dkr475), on upgraded next-generation insulin (degludec) forecasts post-
recent P3 data and further competitor (Bydureon) setbacks. Despite long-
term appeal we stay Holders of Sanofi on near-term headwinds/a neu
tral
view on the Genzyme price, though the deal delivers double digit-
adj.EPS
accretion as expected, softening the blow of
12
s Plavix royalty loss.
Revised adj. QVPS valuations supportive of fundamental views
We also publish new CS adjusted Quest valuations, taking the default cash-
flow return framework off-line to capitalise for R&D and input our 10-
year
forecasts. The results largely support our NPV
s
/recommendations, with
~50% upside for Bayer, Novartis and Roche. Novo is the biggest mover
(adj.QVPS +40% to Dkr480), reflecting significant recent forecast increases.

Page 2 | Pharmaceuticals & Biotechnology | 16 March 2011 | www.csquest.com
Sector view/updates
Publishing remainder of company updates
We publish the remainder of our recent post-Q4 model updates (Bayer,
Novo, and Sanofi consolidating for Genzyme), alongside a set of new
adjusted Quest valuations. We also take the opportunity to update/correct
our published EBITDA numbers for GSK/AZN post recent AR/20F-
publications. There are no significant changes to views; model updates are
detailed where relevant below. We
d highlight we see >40% upside on NPV
for Buy-rated Bayer and Novartis, as well as Hold-rated Sanofi. Quest
shares that view on the former two and sees similar upside at Roche.
Sector valuation/weakness pushes us off
neutral
fence
Preference for individual names aside, we
d highlight sector valuation looks
increasingly appealing and levered FCF yields >10% are difficult to ignore
given the benign risk-profile. Recent modest sector underperformance
(c.10% over the past year, FX-adjusted) isn
t surprising in the current
monetary/fiscal environment but given the uncertainty over outlook post-
QE2 we think it may be an opportune moment to selectively revisit sector
holdings. We note an
11E adjusted sector-PE of 9x for the large-cap names
hardly appears to reflect a solid-at-worst outlook for most names.
Figure 1: Sector up/downside to NPV/adj. Quest
-40%
-20%
0%
20%
40%
60%
80%
A
Z
N
B
a
y
e
r
G
S
K
N
o
v
a
r
t
i
s
N
o
v
o
R
o
c
h
e
S
a
n
o
f
i
S
h
i
r
e
NPV
QVPS
Source: Collins Stewart Research
Figure 2: Sector summary
Source: Collins Stewart Research

Page 3 | Pharmaceuticals & Biotechnology | 16 March 2011 | www.csquest.com
Preference for diversified names retained
Broadly we retain our preference for the diversified healthcare names
(Novartis, GSK) within the sector. Both have underperformed relative to
expectations on idiosyncracies (legal charges for GSK, Alcon technicalities
for Novartis) creating appealing entry points. Bayer remains our top-pick as
a
special case
we expect to outperform independent of sector sentiment.
Whilst we see similar NPV upside for Roche as GSK, and even greater at
Sanofi, both remain hold-rated given current headwinds. We continue to see
AstraZeneca
s mid-term outlook as challenged, and will update our view on
Shire shortly.
AstraZeneca (Hold): cash returns peg pressured outlook
Having already published our updated model there is little change to our
view on AZN: we continue to view the mid-term outlook as challenged but
see modest upside on NPV and expect an
11E >10% buyback+divi yield to
assuage mid-term concerns.
AZN has two key catalysts this year:
1. The US decision on Brilinta (NPV 199p/sh NPV on peak sales of
$1.8bn, of which ~a third is risk-adjusted US). It is approved in
the EU but the US decision has been delayed to 20/7/11. We
continue to see significant risks to US approval as per previous
comments, and even in the event of approval think the product
will struggle to beat expectations given imminent genericisation
of its most direct competitor (Sanofi's Plavix)
2. The H2 results of a head-to-head study ('SATURN') for key in-
line growth driver, statin Crestor (NPV 588p/sh, '11E sales
$6.6bn) vs the world's biggest selling drug, Lipitor. This is key as
Lipitor goes generic at the end of this year; if SATURN doesn't
show a trend at least to superiority vs Lipitor, current growth is
likely to be curtailed as patients switch to cheaper generic Lipitor.
Figure 3: local prices Figure 4: FX-adj. prices (
)
70
90
110
130
09/03/2010 09/06/2010 09/09/2010 09/12/2010 09/03/2011
ASTRAZENECA
BAYER
GLAXOSMITHKLINE
NOVARTIS 'R'
SANOFI-AVENTIS
ROCHE HOLDING
EURO STOXX - PRICE INDEX
70
90
110
130
09/03/2010 09/06/2010 09/09/2010 09/12/2010 09/03/2011
ASTRAZENECA
BAYER
GLAXOSMITHKLINE
NOVARTIS 'R'
SANOFI-AVENTIS
ROCHE HOLDING
EURO STOXX - PRICE INDEX
Source: Collins Stewart Research Source: Collins Stewart Research
Figure 5: AZN group sales ($bn)
0
5
10
15
20
25
30
35
09E 10E 11E 12E 13E 14E 15E 16E 17E 18E 19E 20E 21E 22E 23E
Other (Services, Tech)
Pharma
Source: Collins Stewart Research

Page 4 | Pharmaceuticals & Biotechnology | 16 March 2011 | www.csquest.com
Bayer (Buy): story on track, remains top-pick
Bayer remains our top sector pick, with ~50% upside on NPV assuming the
story continues to unfold positively as we expect. We expect the current
conglomerate structure is likely to be a focus at tomorrow
s investor day (the
first time many will have first hand experience of new CEO Dekkers), though
we don
t expect management to deviate from the party line of
no exit
. More
importantly, we expect positive Xarelto MAGELLAN data at ACC (April 2-5)
to crystallise a >
1bn opportunity and round-out Xarelto
s pan-spectrum
best in class profile. We expect US approval of the minor indication VTE-
prevention in July and EU/US approval for stroke prevention in October. The
VTE-prevention decision is likely to be important as a read-across for the
latter, whilst the stroke prevention advisory meeting (likely Q3) should be
Bayer
s key catalyst for 2011.
Model adjustments: our NPV is unch. at
77 whilst our SoP rises to
76
from
74 on a higher pharma NPV and, slightly lower net debt. Sales
forecasts are up ~2% on various changes, whilst clean EBITDA is virtually
unch. on slightly lowered divisional margin expectations and EPS trimmed
modestly (down c3-4%) on tax and margins near-term.
GSK (Buy): look to H2 for the recovery
GSK has begun to regain some momentum post the recent key approval for
lupus drug Benlysta, but most newsflow is H2-weighted (critically pivotal
results in COPD for Advair follow-on Relovair (60p/sh NPV)). That should be
mirrored by an improving financial performance as tough comps wash-out
(H1N1, Avandia, Valtrex) and GSK returns to reported top line growth, with a
low-mid single-digit top-line growth outlook translating into high single-digit
EPS growth with the help of buybacks. We see little risk of EU generic
Advair approvals in
11 and expect strong Relovair results will do much to
assuage overhanging concern on respiratory franchise sustainability.
Model adjustments: we have corrected an error in our most recently
published EBITDA estimates and updated underlying D&A assumptions post
annual report publication. There is no change to NPV, sales or EPS.
Novartis (Buy): remains the best play on healthcare
Technical Alcon pressures aside, and with the pipeline continuing to perform
strongly (good recent data for INC424 in myelofibrosis and a bullish
management forecast it will become a blockbuster) we continue to view
Novartis
valuation as somewhat bewildering. We expect buyback reinitiation
20/4 (post the Q1 results
our estimate) to trigger a warranted bounce. The
market remains concerned over the imminent genericisation of flagship drug
Diovan but a strong ongoing launch for Gilenya and recent additional
evidence of willingness to make hard decisions on restructuring provide
more than adequate reassurance. Realistic synergy guidance on Alcon due
Q2 should prove a key positive catalyst.
Figure 6: Bayer group sales (
bn)
0
5
10
15
20
25
30
35
40
45
50
09E 10E 11E 12E 13E 14E 15E 16E 17E 18E 19E 20E 21E 22E 23E 24E
MaterialScience
CropScience
Animal
OTC
Pharma
Source: Collins Stewart Research
Figure 7: GSK sales (£bn)
0
5
10
15
20
25
30
09E 10E 11E 12E 13E 14E 15E 16E 17E 18E 19E 20E 21E 22E 23E
OTC
Vaccines
Pharma
Source: Collins Stewart Research
Figure 8: Novartis sales ($bn)
0
10
20
30
40
50
60
70
09A 10E 11E 12E 13E 14E 15E 16E 17E 18E 19E 20E 21E 22E 23E
Other (Alcon)
OTC
Generics
Vacc & Diag
Pharma
Source: Collins Stewart Research

Page 5 | Pharmaceuticals & Biotechnology | 16 March 2011 | www.csquest.com
Novo Nordisk (Sell): little to dent sentiment
Our fundamental sell is unchanged, though given that is largely premised on
biosimilar concern where material generic insulin newsflow remains mostly
mid-term, we see modest chance of a near-term correction. Meantime, most
things continue to go Novo
s way, with further recent competitor setbacks to
Victoza again supporting upgrades to near-term estimates. The capital
markets day 5/5 is likely to create more positive headlines around the recent
strong data announced for their next-generation insulin degludec (plus
implications it will help stave off the biosimilar threat), and we expect the
market to continue parking mid-term/valuation concerns near-term.
Model adjustments: Our sales and EPS forecasts are largely unch. and in-
line with management guidance of FX-adj sales +10% and op profit +15%
(though we note that has typically been raised through the year). Mid-term
our EPS are up mid-single digits on improved margin estimates and
degludec. Our NPV is up 12% to Dkr475, primarily on doubling our degludec
estimates adding ~Dkr40 to the NPV.
Roche (Hold): recent weakness excessive
There
s no change to our view on Roche: recent weakness looks excessive,
with a final capitulation in sentiment post-Q4 and an adverse imminent
CATT outcome looking more than factored in. Our fundamental view
remains mid-term biosimilar risks and pipeline optionality look finely
balanced. Most importantly perhaps, we see minimal risks from further
organic (ie. FX-aside) EPS downgrades, and would suggest estimate risks
now clearly lie to the upside for the first time in years. However, prevailing
CHF strength is likely to see the shares remain pressured.
Sanofi (Hold): remains cheap, near-term headwinds tough
As early fans of the Viehbacher renaissance we retain the view Sanofi
s
mid-term prospects are robust and current valuation too low, with significant
upside on NPV. We aren
t yet moved however to change our current
Hold

view post-last summer
s downgrade on the twin impacts of substitutable
Lovenox and resulting increased acquisition appetite. Genzyme will certainly
deliver double digit EPS accretion (>15% by
13E if guidance is met) but we
are neutral on the price paid and see little impact on NPV. We still think
genzyme will need a lot of fixing, and the near-term earnings outlook
remains bleak, with additional risk from Eloxatin generics and this mornig
s
termination of the Merial/IV JV a material negative.
Model adjustments: Our NPV is cut 2% to
67 (largely FX), whilst ex-
Genzyme our model sees minimal sales and EPS changes. Including
Genzyme we see EPS accretion of 5% in
11 rising to 12% in
14. We see
accretion of ~65c (10%) in
13 and think Sanofi
s
0.75-1 accretion guidance
looks somewhat optimistic on the pace and extent of Genzyme
s EBITA
recovery. We note Genzyme
s consistent track record of missing guidance.
Figure 9: Novo sales (Dkrbn)
0
10
20
30
40
50
60
70
80
90
100
09E 10E 11E 12E 13E 14E 15E 16E 17E 18E 19E 20E 21E 22E 23E
Modern Insulin sales
Victoza
Other Diabetes Sales
Biopharma sales
Source: Collins Stewart Research
Figure 10: Rpche sales (CHFbn)
0
10
20
30
40
50
60
09E 10E 11E 12E 13E 14E 15E 16E 17E 18E 19E 20E 21E 22E 23E
Diagnostics
Pharma
Source: Collins Stewart Research
Figure 11: Sanofi sales (
bn)
0
5
10
15
20
25
30
35
40
09E 10E 11E 12E 13E 14E 15E 16E 17E 18E 19E 20E 21E 22E 23E
Genzyme
Merial (100%)
SP-MSD vacc. (50%)
Vaccines
Generics
OTC
Pharma
Source: Collins Stewart Research
Figure 12: Sanofi/Genzyme EPS accretion
Source: Collins Stewart Research

Page 6 | Pharmaceuticals & Biotechnology | 16 March 2011 | www.csquest.com
Updates Quest valuation and returns
profiles
We have updated our sector adjusted-Quest valuations, taking the default
Quest valuations off-line to capitalise for R&D and incorporate our 10 year
forecasts into the modeller scenario (vs 2yr consensus forecasts and then a
fade to a default historical industry average). The Quest valuations assume
a corporate asset life of 10 yrs which assumes an ~8 year R&D life. In
general, the results mirror the results of our own NPV modelling, with the
most obvious discrepancies Sanofi (greater upside on NPV) and Roche
(greater upside on Quest)
refer to Figure 1.
Figure 13: Adj. QVPS
Source: Collins Stewart Research
Figure 14: AZN adjusted Quest returns profile Figure 15: BAY adjusted Quest returns profile
-5
0
5
10
15
20
25
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2019
CFROA
Forecast
CFROC
CFROC
Cost of
capital
-5
0
5
10
15
20
25
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2019
CFROA
Forecast
CFROC
CFROC
Cost of
capital
Source: Collins Stewart Research Source: Collins Stewart Research
Figure 16: GSK adjusted Quest returns profile Figure 17: NOVN adjusted Quest returns profile
-5
0
5
10
15
20
25
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2019
CFROA
Forecast
CFROC
CFROC
Cost of
capital
-5
0
5
10
15
20
25
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2019
CFROA
Forecast
CFROC
CFROC
Cost of
capital
Source: Collins Stewart Research Source: Collins Stewart Research
Figure 18: NOVO adjusted Quest returns profile Figure 19: ROG adjusted Quest returns profile
-5
0
5
10
15
20
25
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2019
CFROA
Forecast
CFROC
CFROC
Cost of
capital
-5
0
5
10
15
20
25
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2019
CFROA
Forecast
CFROC
CFROC
Cost of
capital
Source: Collins Stewart Research Source: Collins Stewart Research

Page 7 | Pharmaceuticals & Biotechnology | 16 March 2011 | www.csquest.com
Figure 20: SAN adjusted Quest returns profile Figure 21: Shire adjusted Quest returns (pending update)
-5
0
5
10
15
20
25
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2019
CFROA
Forecast
CFROC
CFROC
Cost of
capital
-5
0
5
10
15
20
25
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
CFROA
Forecast
CFROC
CFROC
Cost of
capital
Source: Collins Stewart Research Source: Collins Stewart Research

Page 8 | Pharmaceuticals & Biotechnology | 16 March 2011 | www.csquest.com
Updated forecasts and NPV models
AstraZeneca
Figure 22: NPV
Source: Collins Stewart Research
Figure 23: P&L
Source: Collins Stewart Research
Figure 24: Cash
Source: Collins Stewart Research

Page 9 | Pharmaceuticals & Biotechnology | 16 March 2011 | www.csquest.com
Figure 25: Pharma forecasts
Source: Collins Stewart Research

Page 10 | Pharmaceuticals & Biotechnology | 16 March 2011 | www.csquest.com
Bayer
Figure 26: NPV
Source: Collins Stewart Research
Figure 27: P&L
Source: Collins Stewart Research

Page 11 | Pharmaceuticals & Biotechnology | 16 March 2011 | www.csquest.com
Figure 28: Cash
Source: Collins Stewart Research
Figure 29: Pharma forecasts
Source: Collins Stewart Research

Page 12 | Pharmaceuticals & Biotechnology | 16 March 2011 | www.csquest.com
GSK
Figure 30: NPV
Source: Collins Stewart Research
Figure 31: P&L
Source: Collins Stewart Research
Figure 32: Cash
Source: Collins Stewart Research

Page 13 | Pharmaceuticals & Biotechnology | 16 March 2011 | www.csquest.com
Figure 33: Pharma forecasts
Source: Collins Stewart Research

Page 14 | Pharmaceuticals & Biotechnology | 16 March 2011 | www.csquest.com
Novartis
Figure 34: NPV
Source: Collins Stewart Research
Figure 35: P&L
Source: Collins Stewart Research

Page 15 | Pharmaceuticals & Biotechnology | 16 March 2011 | www.csquest.com
Figure 36: Cash
Source: Collins Stewart Research

Page 16 | Pharmaceuticals & Biotechnology | 16 March 2011 | www.csquest.com
Figure 37: Pharma forecasts
Source: Collins Stewart Research

Page 17 | Pharmaceuticals & Biotechnology | 16 March 2011 | www.csquest.com
Novo Nordisk
Figure 38: NPV
Source: Collins Stewart Research
Figure 39: P&L
Source: Collins Stewart Research

Page 18 | Pharmaceuticals & Biotechnology | 16 March 2011 | www.csquest.com
Figure 40: Cash
Source: Collins Stewart Research
Figure 41: Novo diabetes
Source: Collins Stewart Research
Figure 42: Novo biopharm
Source: Collins Stewart Research

Page 19 | Pharmaceuticals & Biotechnology | 16 March 2011 | www.csquest.com
Roche
Figure 43: NPV
Source: Collins Stewart Research
Figure 44: P&L
Source: Collins Stewart Research
Figure 45: Cash
Source: Collins Stewart Research

Page 20 | Pharmaceuticals & Biotechnology | 16 March 2011 | www.csquest.com
Figure 46: Pharma forecasts
Source: Collins Stewart Research

Page 21 | Pharmaceuticals & Biotechnology | 16 March 2011 | www.csquest.com
Sanofi
Figure 47: NPV
Source: Collins Stewart Research
Figure 48: P&L
Source: Collins Stewart Research

Page 22 | Pharmaceuticals & Biotechnology | 16 March 2011 | www.csquest.com
Figure 49: Cash
Source: Collins Stewart Research
Figure 50: Pharma forecasts
Source: Collins Stewart Research

Page 23
|
Ph
armaceuti
cals &
Bio
tech
nolo
gy |
16
March 20
11
| www.
csquest
.com
Figure 51: Sector valuations
Source: Collins Stewart Research

Page 24 | Pharmaceuticals & Biotechnology | 16 March 2011 | www.csquest.com
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Fundamental Research Recommendations issued by Collins Stewart Europe Limited in Q4 2010
Recommendations Buys
Sells
Hold/Neutral
Percentage of Total
62%
8%
30%
Percentage of which in Corporate Client stocks
16%
0%
1%