Shares in big cap pharma AstraZeneca (LON:AZN) gained ground midweek as heavyweight broker Morgan Stanley said the sector was now fairly valued.
It rates Astra a preferred pick and has pushed the rating on the stock to 'overweight' from 'underweight' and kicked the price target to £53 from £43. Astra shares rose 2.05% to around £46.
The broker notes that European Pharmas have outperformed the European market by 7% over the last 12 months, and trade at a 13% premium on a 12-month forward price to earnings (PE) ratio.
It expects mid-single digit sales growth for the sector in the next five years, and reckons the increasing probability of US interest rates hikes in 2016 will keep a lid on sector outperformance as has been the case previously.
However, it does reckon M&A activity should remain active as big pharma is still refurbishing its pipeline with biotech and/or specialty drugs and divesting non-core assets.
Notably, Morgan Stanley reckons the deceleration in emerging markets is here to stay, as regulatory changes in China and slower GDP growth in China and Latin America appear to be more structural than the inherent volatility the sector used to show.
Morgan's preferred large cap pharmas are Roche, Astra and Novo Nordisk.
In specialty pharma, its preferred stocks are Actelion and UCB.