Healing time for Pharma
456 Monday, 6 October 2025 13:29
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Growing contrast between the macro backdrop and the market
- On the one hand, the US government shutdown, the job market slowdown, and the consumer confidence decline call for some caution on richly valued US equities. In Europe, there is no shutdown, but there is a very fragile government in France and overall growth conditions in the region are weak. In China, real estate remains in the doldrums, and consumers continue to face this balance sheet recession that prevents them from spending.
- On the other hand, corporate activity is booming, with M&A volumes in the Tech sector up 75% YTD in the US versus the same period last year! According to Dealogic, the Technology sector is by far the most active in terms of M&A transactions in the US, with YTD volumes of above USD500bn. Concurrently, the earnings season will slowly start this week, and although we expect fewer surprises versus consensus than in Q2, the EPS growth picture looks healthy (+8% YOY expected for the S&P 500, of which +21% expected for the Information Technology sector). Meanwhile, in Europe, one of the major sectors, namely Healthcare, is experiencing a turnaround, which we discuss below.
- To avoid the Truman trap (“Give me a one-handed economist”), we have advocated a less aggressive stance on risk assets. This asset allocation change is made easier by the relatively attractive bond market if the Fed walks the dot plot walk.
The revival of the Pharma sector
- We take stock of the sector’s big recovery last week. Should we keep an OW?
- Both in Europe and the US, the Healthcare sector has lagged meaningfully behind the market in recent quarters. The Pharma sector in particular faced significant challenges, with the persistent threat of trade tariffs and the strong pressure from the US administration to bring down prices (see Most Favoured Nation pressure jumps again). Signs of a turnaround have emerged this summer, and it is now increasingly apparent that the worst is behind us. We thus reiterate our Overweight stance on the sector.
- Several initiatives have emerged in recent days. Last week, Pfizer agreed to slash some of its drug prices by up to 85% and sell directly to the American public in exchange for a three-year grace period from pharmaceutical tariffs. The deal is expected to be followed by similar agreements with other major drugmakers, with Eli Lilly & Co. already in active discussions with the administration over further expansion of patient access and making medicines more affordable. Although at face value such deals might weigh on profit margins, the renewed visibility on the sector is a clear positive that overshadows the negatives that appear to be priced in.
- Major Pharma companies have announced large investments in the US in the coming years and are likely to avoid the 100% trade tariffs on branded drug imports that were most recently announced by President Trump.
- We show in the report that the downward pressure on Pharma stock prices has brought valuations to very attractive levels. This, coupled with the sector’s defensive and growth bias, which we currently favour, means that Healthcare is now one of our most preferred sectors.
- The sensitivity of European Pharma stocks to US dollar fluctuations remains a potential headwind going forward. However, if we’re right that the ECB might resume cutting in early 2026, another leg down in the dollar is not imminent, and the attractive valuation provides a buffer.
Week ahead: With the government shutdown hampering data releases in the US, the September job market report has been delayed. However, the FOMC meeting minutes will be available this week. In the euro area, retail sales for August will be published.
Pharma stocks poised for a strong comeback
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