Pharmaceutical deals push markets higher
European markets have returned from the Easter break in positive mood, thanks to the spate of deals, real and reported, in the pharmaceutical sector, writes Nick Fletcher. GlaxoSmithKline and Novartis have announced an asset swap plus plans to merge their consumer businesses, while AstraZeneca has been lifted by talk of a possible approach from Pfizer. Hopes for an easing of the tensions in Ukraine helped to support the positive mood, while US markets were lifted by positive results from technology stocks like Netflix. So the final scores were:
• The FTSE 100 finished 56.51 points or 0.85% higher at 6681.76
• Germany’s Dax climbed 2.02% to 9600.09
• France’s Cac closed 1.18% better at 4484.21
• Italy’s FTSE MIB ended 1.49% higher at 21,935.34
• Spain’s Ibex added 1.41% to 10,437.8
On Wall Street, the Dow Jones Industrial Average is currently up 93 points or 0.57%.
On that note, it’s time to close up for the evening. Thanks for all your comments and we’ll be back again tomorrow.
Elsewhere the trial of Sir David Jones, former executive chairman of the defunct JJB Sports chain, has been put back until February 2015 due to his ill health. Jones was accused of forging a bank statement to disguise the fact he had borrowed £1.5m.
The full story is here.
The pharmaceutical rally continues to push shares up in Europe — Shire has now overtaken Glaxo and AstraZeneca at the top of the FTSE 100 risers.
Shire is up 7.2% in late trading, even though it isn’t actually involved in today’s splurge of M&A activity — clearly analysts reckon the sector is ripe for further dealmaking….
More than 200,000 Greeks apply to share in primary surplus
Back to Greece, where more than 200,000 Greeks have rushed to apply for a slice of the primary budget surplus that Eurostat, the EU’s statistics agency, is expected to announce the country will officially post tomorrow.
Our correspondent Helena Smith reports:
By midday, today, some 225,000 Greeks had applied for the so-called “social dividends” the government has vowed to hand out from the primary surplus Athens is projected to have posted in 2013.
How much, exactly, that surplus will be is anyone’s guess: at last count, the conservative-dominated coalition had reckoned it would hover around 2.5 billion euro before interest payments – more than three times the 800 million it had originally estimated. Almost all of the political opposition, however, have argued that the very notion of a primary surplus is a fiction – cooked up by a government that has not only trimmed the books savagely but failed to factor in basic things like state debts to suppliers.
Some regular blog readers have also raised concerns over the validity of Athens figures (see this comprehensive discussion from last week)
Eurostat will give its verdict tomorrow. And with crucial European and local elections in May, prime minister Antonis Samaras will attempt to make as much political mileage out of the achievement as possible.
Samaras has already vowed to return a full 70% of the surplus to those Greeks most affected by the biting spending cuts and tax increases imposed since the start of the debt crisis. “We must help those most affected by the crisis, in order to give them a second chance” the leader said, just before Greece returned to the debt markets on April 11. “We care about those who are in need. Our goal is to exit the crisis without leaving anyone behind.”
Most of the benefits – including a one-off ‘bonus’ payment of 500 euro – are expected to be distributed to low-income pensioners and members of the police and security services whose wages, in keeping with the vast majority of those employed in the public sector, have been cut dramatically over the past four years.
Highlighting the desperation of ordinary Greeks, around 140,000 scrambled to submit electronic applications since the process was opened last Thursday.
But by yesterday nearly half –71,000 — had been rejected for failing to meet the income criteria and other conditions set out by the government, according to the general Secretariat for Information Systems handling the procedure.
With barely a month before May’s elections, the radical left main opposition Syriza party has lashed out at the government for peddling vote-catching “lies” saying the so –called surplus has been achieved with a surplus of unemployed and poverty stricken Greeks.
Earlier today, the government spokesman Simos Kedigoglou hit back at Syriza and its leader Alexis Tsipras saying both were suffering from a “surplus of despair.”
“They betted on catastrophe which never came and now they are distressed by the ever growing signs of exit from the crisis,” he said in a statement.
More decent economic news, this time in Europe.
Eurozone consumer confidence has hit the highest level since late 2007, according to the EC’s monthly survey.
IHS Global Insight’s Howard Archer suggests Europeans have shrugged off geopolitical worries, thanks to the recent drop in eurozone unemployment. He writes:
This suggests that the Ukraine/Russia crisis has still not worried consumers unduly.
Low inflation and stabilizing job markets likely buoyed consumers in April. Consumers have recently also been less worried about the recent economic situation and more optimistic about the outlook.
It may also deter the European Central Bank from launching new stimulus measures soon — if rising consumer confidence translates into higher spending, there’s less risk of Europe slumping into deflation.
Back to the US, and two pieces of economic data have just beaten forecasts.
Existing home sales in America fell by 0.2% in March, to an annual rate of 4.59 million new homes. That’s the weakest rate since July 2012, but better than expected.
And the Richmond manufacturing index has jumped to +7 this month, from -7 in March — suggesting a healthy rally in activity.
Societe Generale’s Kit Juckes is cheered, at least for a moment…..
Oh, speaking of Thomas Piketty… his book on how capitalism is failing (most of) us by driving up inequality is now topping the bestseller list on Amazon.com:
Way back when I first started my career [in 1992, I believe….], pharmaceutical companies were growth stocks – 20-30 times PE – now, its more like 15-18 times for the European majors. But then the top selling drug in the world at the time – the anti ulcer drug Zantac – went off patent in the US in 1997. Faced with the financial disaster from that, Glaxo decided to merge with Wellcome in 1995, two years before the hit. Then later in 2000, it merged with Smithkline, whilst patents were being lost in other territories.
Two large deals around the key patent hit from Zantac. The deals and resultant cost cutting helped to obfuscate the resultant damage to profits. When industries lack top line growth, then M&A occurs – cost cutting provides the profit growth instead. On top of that, drugs are predominantly bought by governments and they are cash constrained. Indebted states will be looking at their drugs’ bills and wanting to make cuts. Austerity makes for difficult times in the pharmaceutical industry.
Louise also reckons that the recent increase in M&S activity means corporate confidence is returning:
It is no longer a case of just hunkering down to avoid the storms. Now executives are willing to take a risk, make an acquisition, sell off a business or float. Good news for economic recovery and good news for future corporate investment.
A gentle start on Wall Street, where the main stock indices have opened a little higher.
The pharmaceutical deal action in Europe this morning is helping prop up the markets, after yesterday’s gains (yesterday the US stock market rose for the fifth day in a row, the first time in 2014).
Dow Jones: up 22 points at 16471, +0.14%
And shares in Netflix have jumped 8%, after the online broadcaster posted good financial results last night (profits and subscribers growth were both up)
US house prices rose 0.6% in February, ahead of the 0.5% monthly gain expected by Wall Street.
The Federal Housing Finance Agency also reported that prices were 6.9% higher than a year ago. It’s figures use home loans made by Fannie Mae and Freddie Mac, America’s two government-sponsored mortgage providers.
The pound has been creeping higher today, touching $1.6839 to the US dollar – close to its highest level since late 2009.
Some traders are speculating that the minutes of the Bank of England’s last monetary policy meeting, released tomorrow morning, could contain signals that interest rates will rise sooner than thought.
Eimear Daly, head of market analysis at Monex Europe,says the minutes will be scrutinised for signs that MPC committee members are turning more hawkish, saying:
Last month’s minutes revealed a division in the committee over the inflation outlook, a key informant of the first rate hike under the Bank’s new forward guidance.
The ‘range of views among Committee members’ over inflation centered on the how quickly the spare capacity gap would be closed and how much sterling’s appreciation would depress inflation.
Average wages have accelerated since August in a sign the economic recovery is eating into the economic output gap. However, inflation continues to fall and the Bank views sterling appreciation as likely to depress price growth in future.
McDonald’s misses earnings forecasts as US sales fall
Fast food giant McDonald’s has missed profit forecasts for the last three months, and reported a drop in sales in America.
The fries-to-McFlurry’s firm has reported earnings of $1.21 per share, missing Wall Street estimates of $1.24 per share. Revenue growth was also weaker than expected.
Like-for-like sales in the US fell by 1.7% in the first three months of 2014, with fewer customers visiting its outlets. McDonalds blamed “challenging industry dynamics and severe winter weather” in the January-March period.
On a brighter note for the company, sales in Europe rose by 1.4% during the quarter, but it was a mixed picture. McDonald’s reported that:
Positive sales performance in the U.K., France and Russia was partially offset by ongoing weakness in Germany.
President and CEO Don Thompson said that McDonald’s priority is “stabilizing key priority markets including the U.S., Germany, Australia and Japan.”
McDonald’s has been hit by tough competition and lacklustre consumer spending in some parts of the globe — as well as last winter’s icy blizzards in the US.
Thompson also acknowledged that McDonald’s faces a struggle:
In the near term, we are prioritizing our efforts around those elements of the restaurant experience that are most impactful – offering the best food and beverage options and delivering outstanding service.
For the long term, we are focused on more effectively leveraging consumer insights to guide our global growth priorities of optimizing our menu, modernizing the customer experience and broadening accessibility to brandMcDonald’s. We are intent on pursuing initiatives that will strengthen our relationship with our customers to reignite our business momentum.
Moody’s has warned that Spain’s efforts to tackle its debts are hampered by its very low inflation rate, which is unlikely to pick up for some time.
In an “update to the market” (rather than a rating action), Moody’s Investors Service said that Spain’s economy is now firmly on an improving trend, but cautioned that its country’s borrowing requirements remain too high for comfort.
Here’s a flavour of the report….
While exports continue to be the main driver of growth, the rating agency also expects domestic demand to contribute positively to growth from this year onwards. However, Spain’s public finances are still comparatively weak with high budget deficits and a rising public debt burden until after the middle of the decade.
The public finances are on a gradually improving trend as well. The need for all sectors of the economy to reduce their high levels of debt will, however, limit the speed of the recovery. Moody’s expects a prolonged period of very low inflation in Spain, which makes the debt reduction a difficult and painful exercise. However, the rating agency does not consider a scenario with outright deflation a probable scenario.
But….. Spain’s “elevated” budget deficit — which is pushing its public debt ratio higher — remains its main credit weakness.
Public debt levels are close to 100% of GDP, among the highest in the Baa rating category, and have experienced one of the fastest increases in Moody’s sovereign universe. While the rating agency expects the budget deficit to be gradually reduced further over the coming years, the public debt will probably only stabilise by 2016. The high borrowing requirements of the sovereign introduce a susceptibility to funding stress that is significantly higher than for most other sovereigns rated in the Baa rating category.
Why all this activity in the pharmaceuticals sector? The WSJ has a pithy explanation:
Many drugs companies have paid down debt from big acquisitions in the early 2000s and are generating a lot of cash.
Generic drug makers are seeking to gain scale as their competitors and customers bulk up. For prescription-drug makers, pressure on pricing in the U.S. and Europe has forced many to cut costs, scale back research and development activities, and think about joining with rivals.
More here: Glaxo, Novartis in Pharma Deal Frenzy
Over in Hong Kong, Royal Bank of Scotland has been fined $6m Hong Kong dollars (or around £500,000) for internal control failures — after not spotting that a trader had falsified her records to hide almost £20m of losses.
The penalty was imposed by the Hong Kong’s Securities and Futures Commission (SFC), as Reuters reports:
The SFC said in a statement RBS failed to detect and prevent unauthorized trades in its emerging markets rates business in the city in 2011, following the discovery of unauthorized trades by former trader Shirlina Tsang.
Tsang was sentenced last year to 50 months in jail after pleading guilty to fraud after was she caught falsifying records of her trades…
Tsang was jailed back in September, after admitting creating false bond trading records from mid-2010 until Oct. 14, 2011 to make it appear she was making a profit. More details here.
GSK has been holding an analyst call to discuss today’s deals with Novartis (buying a vaccine arm, selling its oncology division, and setting up a consumer healthcare joint venture).
City analyst Louise Cooper tweets the key points:
Pharmaceuticals deal frenzy pushes up shares
Back to the big story of the morning, the deal fever in UK pharmaceuticals which continues to drive Europe’s stock markets higher.
Drugs firms continue to lead the FTSE 100 risers, with AstraZeneca up 7% amid swirling speculation that Pfizer, or a rival, could launch a $100bn bid.
While the multi-billion dollar asset swaps and joint venture between Novartis and Glaxo has pushed their shares high too — GSK are up 5.4% in London, while Novartis has gained 2.5% in Switzerland.
Sarah Butler rounds up the news:
Novartis and GlaxoSmithKline have agreed a multibillion dollar swap of assets under which the two pharmaceutical firms will join forces in the consumer healthcare sector combining brands including Aquafresh, Beechams and Tixylix and exchange their oncology and vaccine businesses.
The deal comes amid a frenzy of takeover speculation in the sector with the US drugs company Pfizer thought to be considering a $100bn (£59bn) bid for AstraZeneca and Valeant Pharmaceuticals looking at Botox-maker Allergan in a $40bn move.
Shares in GSK rose 5% to £16.40 and Switzerland’s Novartis rose 2.75% to 76.75 Swiss francs in early trading. AstraZeneca rose almost 8% and the UK’s Shire jumped 4.6% to £30.62 owing to hopes of more deals to come.
GSK shareholders will benefit from a £4bn capital return funded by net proceeds of $7.8bn from the deal, in which the Brentford-based firm is selling its oncology business to Novartis for $16bn and purchasing its new partner’s vaccine business for an initial $5.25bn. A further $1.8bn is promised if the division performs well.
Novartis, meanwhile, is selling its animal health division to US pharmaceutical company Eli Lilly for $5.4bn.
And over on City AM, Peter Spence has rounded up the best analyst comments on Pfizer’s approach to Astra:
Last night, Citi’s Andrew Baum suggested that the offer is “very likely genuine” after The Sunday Times first reported that a tentative bid had been made. Credit Suisse’s Vamil Divan notes that overlap with Lipitor and Crestor could cause some headaches with the Federal Trade Commission, but these “would not be prohibitive.”
Divan sees synergies in primary care infrastructure, emerging markets, and in combining oncology assets. And Citi’s note sees the acquisition fitting into Pfizer’s “key strategic goals for immunotherapy and autoimmune disease.” Baum says that the deal could transform Pfizer’s competitive presence in that sector.
Deutsche Bank’s Mark Clark is less confident that the bid will materialise, noting that Sunday Times and Bloomberg stories on the deal seem to conflict over when a second approach took place, and that the report remains unconfirmed. “Bid rumours occur relatively frequently in the Pharma sector – witness market suggestions in the last year of, for example, a Novartis/Roche deal and a US-based approach for Shire, which turned out to be false,” says Clark.
A couple of Greek news stories to flag up.
Greece’s prime minister, Antonis Samaras, has predicted that the recovery in the country’s bond prices will continue, pushing down borrowing costs (although there are no plans to repeat this month’s oversubscribed debt sale).
He told the Kathimerini newspaper that:
We reached rock bottom and now we can only go up and we will only go up,”
But a survey by UK academics has highlighted the human cost of hitting ‘rock bottom’ — a rise in suicides across Greece since the debt crisis began.
My colleague Katie Allen reports today:
Echoing official statistics in the UK showing suicide rates are still higher than before the crisis, researchers at the University of Portsmouth have found a correlation between spending cuts and suicides in Greece.
According to the research, every 1% fall in government spending in Greece led to a 0.43% rise in suicides among men – after controlling for other characteristics that might lead to suicide, 551 men killed themselves “solely because of fiscal austerity” between 2009 and 2010, said the paper’s co-author Nikolaos Antonakakis.
“That is almost one person per day. Given that in 2010 there were around two suicides in Greece per day, it appears 50% were due to austerity,” he said.
Here’s the full story:
Construction activity in the eurozone inched a little higher in February, according to Eurostat’s latest survey this morning, suggesting that Europe’s recovery from recession remains weak but steady.
Eurostat found that production by eurozone construction firms rose by 0.1% month-on-month, and was 6.7% higher than in February 2013 (when the euro economy was still shrinking).
The annual data also shows that building activity in Portugal and Italy has shrunk over the last 12 months, but has picked up strongly in Spain.
The highest [annual]increases in production in construction were registered in Slovenia (+33.1%), Hungary (+28.3%), Spain (+23.9%), Poland (+14.4%) and Germany (+14.1%), and the largest decreases in Romania (-14.7%), Portugal (-11.5%) and Italy (-7.9%).
While on a monthly basis….
The highest [monthly] increases in production in construction were observed in Poland (+17.4%), Hungary (+8.2%) and Spain (+3.0%), and the largest decreases in Slovenia (-4.9%), Italy (-3.7%) and the United Kingdom (-2.8%).
Bank of England: Lending to UK firms is still falling
Bank lending to UK businesses continues to shrink, despite efforts to drive credit to small firms.
Mortgage lending, though, continues to rise — which won’t dent fears that Britain’s economic recovery is based on the shifting sands of a housing boom.
That’s the message from the Bank of England’s monthly “Trends in Lending” report, which states:
The stock of lending both to small and medium-sized enterprises and to large businesses contracted over this period. Mortgage approvals by all UK-resident mortgage lenders for house purchase continued to rise, on average, in the three months to February.
The annual rate of growth in the stock of secured lending to individuals rose to 1.1%. The annual rate of growth in the stock of consumer credit continued to be strong.
The annual rate of growth in the stock of lending to UK businesses remained negative in the three months to February.
Not a ringing endorsement of the BoE’s Funding for Lending Scheme (which was recently revamped to remove support for mortgage lending), as economist Shaun Richards tweets:
Dutch electronics firm Philips has seen 7.4%, or €1.7bn, wiped off its stock market value this morning after becoming the latest European firm to suffer from the strong euro.
Philips suffered a 22% plunge in earnings in the first three months of 2014, to €314m, well shy of analyst forecasts of €341m.
It warned that unfavourable exchange rates and slowing demand for medical equipment in China and Russia means 2014 will be “challenging”. More here.
The rally in pharmaceutical stocks has driven European stock markets higher, with the FTSE 100 jumping 53 points to 6679, a two-week high.
The German DAX has jumped 1%, as the optimism created by M&A activity ripples around.
Ishaq Siddiqi, analyst at ETX Capital, says the GSK-Novartis deal is:
Welcome news for Glaxo shareholders; the company managed to dispose of the oncology business which was suffering against the oncology units at global peers such as Roche and AstraZeneca. The combined consumer healthcare business controlled by GSK should also cheer investors given the current strength of Novartis’s consumer healthcare portfolio.
The prospect of a massive takeover bid ($100bn?!) for AstraZeneca continues to excite traders, even though the UK pharmaceutical firm resisted Pfizer’s recent approach (here’s our story from Sunday).
With Astra’s shares up 7.6%, the City reckons it could still be a takeover target, as Siddiqi explains:
A combination of both companies would help with reducing huge costs – so although talks have ended for now, market participants are expecting AstraZeneca to now be in the spotlight as an attractive takeover candidate by not only Pfizer but other global pharma firms.
Here’s a handy explanation of the healthcare brands that will come together in Novartis and GSK’s new consumer healthcare operation, from PA:
The tie-up will create a world-leading business with annual revenues of around £6.5 billion from Glaxo products such as Aquafresh and Beechams and antiseptic range Savlon and cough and cold brand Tixylix from Novartis.
Glaxo’s CEO, Andrew Witty, has suggested that today’s deal with Novartis (details below) could lead to more jobs being created in the UK.
He told my colleague Sarah Butler that there will be “minimal impact” to its workforce in the UK. Indeed, GSK plans to invest some of the deal’s proceeds in research and development, potentially boosting employment within Britain.
Here’s a couple more snaps from the GSK conference call:
- GLAXOSMITHKLINE CEO SAYS NOVARTIS DEAL MAKES COMPANY “BIG IN VACCINES, CONSUMER” AND SOME AREAS OF PHARMA
- GSK CEO SAYS NOVARTIS DEAL IS RECOGNITION OF VALUE OF ONCOLOGY BUSINESS, NO CHANGE ON EARLY R&D
Shares in pharmaceutical firms have jumped in early trading in Europe.
Investors are welcoming the Novartis-GSK deals, and the prospect of Pfizer launching a huge takeover bid for AstraZeneca — whose shares are leading the London stock market.
Here’s the details:
- AstraZeneca: up 7.6%, gaining 284p to £40.71.
- GSK: up 4.1%, gaining 65p at £16.23
- Novartis: up 2.75%, gaining 2.05 swiss francs to CHF76.75
And UK’s drugs firm Shire is also sharing in the M&A uplift:
- Shire: up 4.6%, gaining 136p to £30.62
Novartis and Glaxo in massive asset swap deal
Good morning, and welcome to our rolling coverage of the financial markets, the global economy, the eurozone and business.
The City is gripped with merger and acquisition fever this morning, with a rash of deals and takeover activity in the pharmaceutical sector to excite investors as they return to their desks.
Two major drugs companies, Switzerland’s Novartis and the UK’s GlaxoSmithKline, swept away any post-Easter cobwebs with a series of multi-billion deals this morning. Both companies’ shares have jumped in early trading.
The agreement is based around an asset swap — Novartis pays up to $16bn for Glazo’s oncology business, and sells its own vaccine business to GSK for up of $7.1bn.
Both companies are then forming a new Consumer Healthcare business.
The Swiss firm is also selling its animal health division to rival Eli Lily for $5.4bn, while Glaxo is planning to give £4bn back to its shareholders.
The tie-up comes just two days after news broke that America’s drug giant Pfizer could be poised to swoop on Britain’s AstraZeneca to create a new giant in the pharma sector. At perhaps £60bn, such a deal could be the biggest takeover of a UK firm ever – although Astra is understood to be cool about the idea.
So what’s the motivation behind Novartis and GSK’s big tie-up? The key, it seems, is to give Novartis a stronger position in the consumer healthcare sector, while GSK cements a stronger position in the vaccines business.
In a world where ageing Western populations require more healthcare, but governments are trying to restrain spending, pharma firms are eager to establish a dominant position in key sectors.
As Novartis CEO Joe Jimenez explained on Bloomberg TV this morning:
I believe you’d better be number one, two or three in your sector, and this is what this deal is all about.
A surge in M&A activity is also going to calm fears that global stock markets are heading for a fall, I suspect.
We’ll have reaction to these deals shortly, along with other breaking news through the day…
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