Morgan Stanley Pair Trade On Novartis And AstraZeneca

Morgan Stanley issued reports Tuesday for Novartis AG (ADR) NVS and AstraZeneca plc (ADR) AZN, creating a possible pair trade.

Analysts led by Nicolas Guyon-Gellin downgraded AstraZeneca from Equal-weight to Underweight and commented, “Strong re-rating suggests AZN's exciting pipeline is priced in and unlikely to compensate for near-term earnings fall and increased pressure on the US primary care growth platforms.”

Guyon-Gellin noted that “management expects a profitability inflection point only in 2018, and near term we worry about the announced SG&A cuts to protect earnings while US primary care oriented growth platforms like Brilinta, diabetes or respiratory require significant investments in a toughening pricing and competitive environment.”

Novatis was upgraded from Underweight to Equal-weight as “3Q14 results suggested Novartis is retaining more productivity gains than we expected, helping to offset generic pressure on margins. This plus the strong pipeline results in heat failure have mitigated our mid-term margin concerns,” according to the analyst note.

Analyst Amy L. Walker commented that “Novartis managed to increase its core operating income margin in the pharmaceuticals business at 3Q14 by 110bps (CER) despite the negative impact of the first quarter of Diovan mono generics in the US market. We are thus more optimistic on Novartis' ability to manage margins through rolling patent expiries to 2020.”

The firm’s price target for Novartis was raised to SFr 99.00 and AstraZeneca was raised to 4,300.00p.

AstraZeneca plc (ADR) recently traded at $72.92, down 1.37 percent.

Novartis AG (ADR) recently traded at $96.01, down 0.39 percent.