European pharma’s growth prescription: pivot to US

Catalent

28/11/2024 12:00

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are her own.)
    By Aimee Donnellan
       LONDON, Nov 28 (Reuters Breakingviews) - The biggest
threat for European pharmaceutical groups currently comes from
the United States. President-elect Donald Trump and his proposed
Health Secretary Robert F. Kennedy Jr amount to a toxic cocktail
of “America First” nationalism and anti-drugmaker sentiment,
which is doubly bad from the perspective of $480 billion Novo
Nordisk  NOVOb.CO , $230 billion Roche  ROG.S  and the rest.
Ironically, the best way to mitigate these risks is to get
closer to the source of the problem. More U.S. manufacturing
investments, and even M&A, could help.
    Trump’s victory has taken its toll on the drugmakers. Six
major Europeans – Novo Nordisk, Roche, Novartis  NOVN.S ,
AstraZeneca  AZN.L , GSK  GSK.L  and Sanofi  SASY.PA  – have
collectively lost $86 billion or 6% of their equity value since
the day before the election, compared with a narrower 2%
aggregate fall for the major U.S. groups. The general fear in
the industry relates to Kennedy, known as RFK, who mistrusts
pharma in general and vaccines in particular. Sources
at European drugmakers told Breakingviews that they worry about
what they see as his lack of public-health pedigree and general
anti-science stance. U.S. drugmakers should feel the same.
    What’s bothering investors in Sanofi, Roche and their
regional peers, however, is that RFK and Trump’s agenda may have
an anti-Europe slant. In September, the cabinet nominee said
lawmakers should cap drug prices so that pharma groups can’t
charge U.S. patients substantially more than those on the other
side of the Atlantic. The discrepancy, he wrote in an opinion
piece for the Wall Street Journal, relates to the fact that
European national health authorities tend to negotiate with
manufacturers on behalf of the whole country, allowing them to
keep prices low. That doesn’t happen in the United States. RFK
name-checked Novo Nordisk’s diabetes and weight-loss medication
Ozempic as an example, stating that in Germany it costs
one-tenth of the prevailing U.S. level. It’s a sensitive area
for the Europeans, since high prices on the other side of
the pond often subsidise drug research and cheap sales for the
rest of the world.
    Meanwhile, Trump’s possible universal import tariff could
whack the pharma groups, wreaking havoc on their U.S.
competitiveness and profitability. In 2023, the European Union
exported 33% of its drugs to the United States, which is
typically one of the highest-margin markets in the world. Unless
the drugmakers could pass on the costs of the mooted 10% to 20%
duties, their bottom lines will take a hit.
    The antidote to all these U.S. problems, paradoxically, lies
in the source. European drugmakers need to become more American.
One option is to boost manufacturing in the United States, thus
avoiding tariffs. That would be hard to do quickly, but making
large pledges and starting work on a new site could probably win
favour with the new administration. Dealmaking could help too.
Novo Holdings, the Novo Nordisk parent company, in February said
it would spend $16.5 billion on contract drug manufacturer
Catalent  CTLT.N . The target’s website lists more sites in
North America than other regions, implying that the Danish giant
has bought itself a handy possible tariff hedge. The only
problem with this strategy is that U.S. M&A, like U.S. labour,
doesn’t come cheap. Breakingviews calculated at the time that
Novo would make a sub-3% return on investment.
    Another strategy could be for European pharma groups to use
M&A to radically change their revenue mix, instead of just their
manufacturing footprint. Buying one of the many large and
fast-growing U.S.-focused biotechnology groups, for example,
would help. That might sound odd, since RFK’s plans could dent
growth in that market. But the idea would be to kickstart a
transformation from being a European drugmaker into a U.S. one.
Moving key executives to New York, and maybe even listing there,
would be the logical next step. If the world’s biggest and most
lucrative drug market is becoming more nationalistic, it
arguably makes sense for the European giants to get inside the
tent.
    Many of the companies at risk also have their own
idiosyncratic reasons to tilt towards the United States.
Novartis, for example, is at the top of the European market and
therefore may find it difficult to grow any further in its home
region. China, which may have previously seemed like an
attractive investment option, now looks dicey given the prospect
of a U.S. trade war.
    Nor is the People’s Republic sending welcoming signals. Just
ask AstraZeneca. The $200 billion Anglo-Swedish drugmaker
revealed late last month that Leon Wang, the president of its
China business was "cooperating with an ongoing investigation."
The company later confirmed that Wang had been detained by
Chinese authorities. Astra CEO Pascal Soriot has already
kickstarted his U.S. pivot. Earlier this month, he announced a
$3.5 billion investment in research and development in the
United States, along with a plan to create more than 1,000 jobs.
    And despite the RFK worries, U.S. drugmakers still often
trade at a premium to their most direct Europe-based rivals,
suggesting that investors think growth there will hold up. In
the red-hot obesity market, for example, Eli Lilly  LLY.N 
trades at 34 times expected 2025 earnings, according to Visible
Alpha, while Denmark’s Novo Nordisk has a multiple of 27.
Similarly, European drugmakers AstraZeneca and Novartis trade at
14 and 13 times their respective forward earnings, while
Illinois-based Abbvie  ABBV.N  is at 15.
    No one is sure exactly what Trump will do with tariffs or
drug prices, and there’s even more uncertainty about how the
effects will ripple out to the rest of the world. But investors
seem convinced that the European groups will come off worst. All
the more reason for a U.S. swerve.
    
    Follow @aimeedonnellan on X

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European drugmakers can expand further in the U.S.    https://reut.rs/3OqpBAZ
European pharma stocks' post-Trump slump    https://reut.rs/3Vch1tr
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 (Editing by Liam Proud and Pranav Kiran)
 ((For previous columns by the author, Reuters customers can
click on  DONNELLAN/ 
Aimee.Donnellan@thomsonreuters.com))