In our Dec 14, 2012 report “Encouraging signs of improving R&D productivity emerging” we argued that there were signals of an improving outlook for industry productivity. With the global sector having delivered 37 new FDA approvals in 2012 (the most since the 1990's), we believe a further 31 could be approved by end 2013 (14 to date). In addition, recent analysis suggests a significant upturn in novel/first-in-class approvals supporting both the quality AND number of new approvals. We remain confident that changes to R&D strategies with increased focus on partnering, biologics and use of biomarkers, will drive a significant improvement in output over the next decade.

2013 set to be a stellar year for EU major pharma new drug pipelines
We believe EU large-cap pharma is on track to deliver 13-15 major new drug approvals this year (10 already approved). These drugs have potential peak sales of $23bn ($18bn risk-adjusted; = 10% of sector pharma/vaccine sales) making 2013 potentially the most successful year for new drug approvals since our analysis began in 2007. Importantly, these include 8 potential blockbusters. With a significant flow of new products hitting de-risking events (i.e. Phase III data) in 2013, potentially adding an additional >$20bn to future sales, we see significant upside to (risk-adjusted) consensus forecasts.

Eoin Treacy's view Healthcare represents an exciting industry that has the potential to enhance the standard of living for billions of people. As such It can be segregated into companies that have long histories of product development and related strong cash flows, companies at the cutting edge of technological innovation that are constantly pushing the frontier of the imagination and a mix of both. Since the majority of such companies quickly develop into global organisations, healthcare is a fertile sector for identifying Autonomies.

This has also ensured that the majority of Europe's pharmaceutical companies bypassed the difficulties of their respective domestic stock markets and have been among the better performers globally since 2009. As such they cannot be considered catch-up contenders as Europe's economics improve but many continue to have attractive characteristics nonetheless.

UK listed GlaxoSmithKline (Est P/E 2014 13.02, DY 5.11%) is an S&P Europe 350 Dividend Aristocrat. The share has held a progression of higher reaction lows since 2009 and surged higher between February and May this year. It continues to consolidate that advance but a sustained move below the 200-day MA would be required to question medium-term recovery potential.

BTG (Est 2014 P/E 21.35) crashed along with most of the speculative segment of the healthcare sector between 2000 and 2002. However, it held a progression of higher reaction lows, within its base, from 2008 and broke out to new seven-year highs in 2011. It has found support in the region of the 200-day MA during reversions to the mean on successive occasions, and a sustained move below it would be required to question recovery potential.

UK and Swedish listed AstraZeneca (Est 2014 P/E 2014 10.08, DY 6.33%) has been ranging in a volatile manner, mostly below 3500p, since 2000. It most recently tested that level in May and will need to sustain a move above it to confirm a return to medium-term demand dominance.

Swedish Orphan Biovitrium (Est 2013 P/E 1619) is one of a relatively small number of companies to specialise in rare diseases. The share has rallied from SEK10 to 50 since late 2011 and accelerated higher from late June. It pulled back sharply yesterday and is susceptible to additional mean reversion.

Swiss listed Actilion (Est 2014 P/E 16.75, DY 1.52%) also specialises in orphan or rare diseases. The share has rallied impressively since bottoming in late 2011 and is now testing the region of the 2007 peak near CHF70. It is becoming increasingly overbought as it approaches this area of potential resistance but a clear downward dynamic, such as that posted on Swedish Orphan Biovitrium, above would be required to check momentum.

Novartis (Est 2014 P/E 13.18, DY 3.37%) has been mostly rangebound since 1999 and has rallied over the last three years to test the upper boundary. It has been consolidating mostly above the 200-day MA for the last couple of months and a sustained move below the trend mean would be required to question medium-term potential for a successful upward break.

Roche (Est 2014 P/E 14.07, DY 3.09%) has rallied impressively over the last two years and posted new all-time highs by May. It found support in the region of the 200-day MA from late June and a sustained move below that level would be required to question medium-term upside potential.

Danish listed Novo Nordisk (Est 2014 P/E 18.48, DY 1.85%) is an S&P Europe 350 Dividend Aristocrat and is one of the more popular pure plays on the global diabetes epidemic. The share hit a peak above DKK1000 in January and has been ranging mostly below that level since. A sustained move above it will be required to reassert medium-term demand dominance.

Lundbeck (Est 2014 P/E 26.89, DY 1.77%) has held a progression of lower major rally highs within its decade long base and a sustained move above DKK130 will be required to question the medium-term downward bias.

German listed Bayer (Est 2014 P/E 13.36, DY 2.2%) has a strong record of dividend increases. The share broke successfully above its 2008 peak a year ago and rallied by 50%. It posted a downside key day reversal 10 days ago, suggesting at least a pause in what has been a steep uptrend to date. A break in the medium-term progression of higher reaction lows, currently near €80, would be required to question the consistency of the overall advance.

French listed Sanofi (Est 2014 P/E 12.56, DY 1.52%) is a former S&P Europe 350 Dividend Aristocrat. The share has paused in the region of its 2002 and 2006 peaks since May. It has so far found support in the region of the 200-day during this consolidation and a sustained move below €75 would be required to question medium-term scope for a successful upward break.

Belgian listed UCB (Est 2014 P/E 20.86, DY 2.1%) is another share consolidating in the upper region of a more than decade long range.

Spanish listed Grifols (Est 2014 P/E 22.56, DY 0.63%) has held a progression of higher major reaction lows since late 2011 but is somewhat overextended in the short-term and susceptible to mean reversion.

Norwegian listed Algeta (Est 2014 P/E 16.75, DY 1.52%) has also rallied impressively over the last couple of months but is also increasingly susceptible to mean reversion.