Watch out for stocks with strong earnings in the US

They are defensive by definition, they are invested in by the most cautious savers who want to get a foot in the door and in the long run they (almost) always pay off. It is the pharmaceutical stocks that, precisely because of their characteristics, are those most present both in the portfolios of households and, above all, in those of asset managers.

There are specific reasons for their appeal: there is always a need for drugs, research is proceeding apace, human life is getting longer with a consequent widening of the catchment area, and technology offers great support for the evolution of the sector. However, there is one variable that could have negative consequences for the future of European (and other) pharma companies: President Trump's decision to reduce the price of American drugs by up to 80%. This news, combined with the announced duties, could have an impact on the business of companies from the old continent, given that the US is their main market. A mix that could significantly reduce profit margins. But there are also those who think that the price intervention will not materialise.

"We believe it is very unlikely that the US administration will reduce drug prices as indicated in the Executive Order," explains Linden Thomson, Senior Fund Manager, Healthcare at Candriam. The latter can certainly be considered a letter of intent, although the press conference was relatively supportive of the biopharmaceutical sector and focused more on price differential issues than on the prices themselves".

Carlo De Luca, Am head of Gamma Capital Market points out that the European multinationals (Sanofi, Roche, Novartis, Novo Nordisk) realise 30%-50% of their revenues in the US and how US margins are vital to their overall profitability. "In Europe, Roche has 42% of its margins coming from the US, Novartis 35% and Sanofi 38%, while in America the most impacted companies are Eli Lilly with 50% of US revenues, Pfizer with 45%, Merck with 40%, and then Bristol Myers, Abbvie, Amgen and J&J. The biggest risk is therefore for those companies that generate more revenues where there is less control, i.e. the US, because in Europe there are already price regulations.

And what should those with pharmaceutical stocks in their portfolio do? "At the moment," concludes De Luca, "the saying 'pharma as bond' no longer applies, so one should underweight stocks that are highly exposed to Medicare and Medicaid and in general all those companies that earn a lot of revenue in the US."