CEE pharmas set to regain investors’ favour in 2010

Having fallen from investors’ grace in 2009, CEE pharma stocks are bound to regain their appeal as defensive titles * CEE pharma companies remain poised to deliver solid business results, albeit growth tempo will be lower compared to pre-crisis levels * Richter and Egis are top picks, Krka’s depressed share price is inviting

In 2009, the gradual return of investors' risk appetite generally played in favor of CEE markets. In particular, the region managed to catch up in the second half of 2009 after the previous under- performance, with the emerging equity market funds recording money inflows and trading volumes starting to pick up. Nevertheless, for CEE pharma stocks (as for other defensives), the decreasing risk aversion was bad news. Their tempo lagged behind those of the banks, real estate titles and cyclicals, so much so as to slip into negative territory in 4Q09. Nevertheless, on a cumulative basis, CEE pharmas' stock price performances (except Bioton) for FY09 remained in high double-digit terms.

 

"Going forward, their defensive nature will play both for and against CEE pharma stocks. For 1Q10, the sentiment is foreseen to favor cyclicals, with investments in pharma titles to be sidelined. However, as economic conditions remain fragile and the impact of the economic slowdown will still be reflecting in cyclicals' business results, we might see a return of investors to defensive titles later in the year. We believe that healthcare - and especially generics players - should then be among the preferred picks," explains Vladimíra Urbánková, pharma sector analyst at Erste Group.

 

The outlook is rather encouraging: CEE pharma companies can expect growth to be restored in all major regional markets, including those hit hardest last year, such as Ukraine. Bolstered by the appreciating ruble, as well as the recovery of oil prices, the crucial Russian market is getting back on track, further supporting CEE-based pharmas. The low comparative base will also help, especially in the first half of 2010. The CEE region's return to the catch-up effect, coupled with demographic factors (such as ageing populations), an increasing public healthcare awareness and the continual progress in bringing innovative medicines to the market should propel CEE pharma markets in the coming years. While the future economic growth will also spur greater resources available for healthcare, the cost-conscious approach of healthcare providers is unlikely to change. This in turn will put pressure on drug reimbursement policies to be as cost-efficient as possible. On the one side, this speaks in favor of generics producers. On the other hand, the pressure on their price-competitiveness will further intensify.

 

Erste Group analysts believe that the top CEE pharma companies are poised to deliver solid business results, although - due to the restrictive drug pricing reimbursement measures - the tempo might be somewhat tempered compared to pre-crisis days. Also in 2010, CEE pharma stocks, representing a safe haven in times of turbulences and uncertainty, will undoubtedly continue to be driven by changing investor sentiment (apart from their business results). However, with their current valuations far below their earlier peaks, the top CEE pharma stocks retain their long-term appeal.

 

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