Basic stance towards European equities remains a positive one

US Stocks

Merck & Co., Inc. (MRK, $59.75, CSFB recommendation: Hold) announced last Friday plans to withdraw its NDA (New Drug Application) for Arcoxia that was filed on October 12th and re-file the NDA with expanded efficacy data to better position the product within the COX-2 category. The company also noted that the new data is expected to better satisfy questions of efficacy as well as safety.

A hidden reason for this withdrawal could be attributed to a FDA Arthritis Advisory Panel meeting scheduled for May 14-15. While an itinerary for the meeting has not been posted, it is likely that Merck's Arcoxia as well as the cardiovascular safety of the COX-2 class may be the subject of the panel meetings.

As included in the original filing, Merck plans to seek indications for osteoarthritis, rheumatoid arthritis, chronic pain, acute pain, dysmenorrhea (menstrual pain) and acute gouty arthritis.

Merck is not providing specifics on Arcoxia re-filing timelines, but CSFB is assuming a nine month delay in original launch timelines for the product line, pushing back commercialisation from 2H02/1H03.

This delay will reduce Arcoxia sales for 2002 and probably 2003 and 2004. CSFB expects Arcoxia sales decrease of $190 million for 2002, $340 million for 2003 and $560 million for 2004.
We think Merck & Co., the second US largest drugs maker, should soon re-file its pipeline with new products developments. We recommend to accumulate the stock below $60.00.

Amgen Inc. (AMGN, $64.41, CSFB recommendation: Strong Buy) announced two separate multi-year agreements with U.S. Oncology and International Oncology to include Aranesp, Neulasta and Neupogen as preferred treatments.

U.S. Oncology is a leading cancer care service provider to community-based practices, with over 850 physician affiliations.
International Oncology is a group purchasing organisation (GPO) supporting community-based oncology practices, with over 2000 oncologists in its network.

These agreements should help the three drugs in penetrating the oncology market. Consensus also expects similar agreements with other major oncology service providers and GPOs to be established in the near future. Aranesp should receive approval for oncology in U.S. in 2H02 and in Europe in late 2002/early 2003. 12-month target price $78.00.

Some macroeconomic indicators will also come out this week. On Tuesday the FOMC will probably remain interest rate at 1.75% due to a low inflation rate and a recovering economy. On Thursday, Consumer Price Index for February is expected to increase 0.2% from January. Finally, on the same day, leading indicators for February will be announced. The consensus expects a +0.1% vs. +0.6% a month earlier. If it is the case, it will be a fifth increase in a row, confirming the rebound.

US Technology

Last week the technology stocks saw some profit-taking activities, as certain worries about valuations came into the market. And as investors sentiment still seem to be sceptical, this might have been reason enough to lock in their short-term profits. However Friday's trading day closed in the positive territory as expectations rise, that signals about the US economic recovery gaining momentum are coming out from the Federal Reserve officials meeting Tuesday. In accordance to that, the Philadelphia Semiconductor Index (SOX) outperformed the NASDAQ Composite Index in Friday's session, as stocks of semiconductor and semiconductor capital equipment companies are early cycle movers.

Oracle Corp. (ORCL $12.60; CSFB rating: Buy) announced lower than expected fiscal third quarter earnings, according to the profit warning issued earlier. The company blamed the slow economy and the corporate customers' reluctance to buy software. In fact competition in the business software sector has become quite strong and the pricing pressure coming from Oracle Corp.'s competitors has hurt the company. Oracle Corp. seems not to see an improvement for the quarter coming, as it forecasts a profit lower by one to two cents than the year earlier fourth quarter's 15 cents. The company's management should have learned to become more conservative in it's earnings forecast, after having missed four out of the five last quarter.

One of the probably most awaited events by technology investors in this week is the shareholder vote on Hewlett-Packard Co.'s (HWP $19.05; CSFB rating: Hold) $20.6 billion acquisition of Compaq Computer Corp. (CPQ $10.33; CSFB rating: Buy). There has been a lot of lobbying both from the opponent's side and the supporter's side. The polls don't show any clear indication of the outcome of the vote, making a call on the vote almost impossible. We have heard a lot of analysts, fund managers and institutional investors stating their pros or cons, which do not really differ from each other. We are not sure if the goals, the Hewlett-Packard Co. management is trying to achieve through this acquisition, are realistic, considering the several overlaps both businesses have. However, the acquisition, if it goes through, could have a major impact to the PC and peripherals industry, as it could become the starting point for a consolidation in the PC market.


Europe

Our basic stance towards European equities remains a positive one. However, we do have to recognise now that the simple value case is wearing a little thin. The relative valuation of equities versus bonds has returned to trend. Bond yields have backed up to 5.3% and equities are trading on broadly 20x earnings. However, even if one feels that the value case for equities is a tougher call we believe that leading indicators suggest that the earnings momentum in the market will improve and sustain performance further albeit at a slower pace than in the past three weeks. We take our optimism from the fact that the earnings revision trend is bottoming and the number of earnings upgrades relative to downgrades is rising.

We would play this positive outlook through cyclical names with a slightly later-cycle exposure, such as chemicals, industrial goods and software. Our key picks in these industries are Celanese (CZZ GY; EUR 23.74), MAN (MAN GY; EUR 30.25) and SAP (SAP GY; EUR 170.07). Safer industries such as the pharma and insurance sectors complete our barbell strategy of cyclicals and reliable growth.

Roche Holding AG (ROG VX; CHF 129) was one of the week's star performers, gaining 5.3%. The company benefited from the EU approval for its pill Valcyte, used in the treatment of AIDS-related retinitis, a condition that can cause blindness. Valcyte was approved in the US one year ago and is expected to replace the company's intravenously administered drug for this treatment. The positive news on the product side was further underlined by rumours that Novartis (NOVN VX; CHF 65.50) has increased its voting rights in Roche to above 30% from 21.30%.

Volumes for the week were more than twice as high as on average. The real size of Novartis' stake is crucial, as the company would be obliged to make an offer to all shareholders if the stake exceeded 33%. Given the discount to the bearer shares (current price CHF 158) we see more upside for 'Genusscheine' if a deal could be reached. Novartis called the rumours unsubstantiated and reiterated that their investment in Roche was a long-term financial investment of strategic significance. We are sceptical and suspect that Novartis is interested in striking a deal, which does not have to be a merger by all means. After last week's strong rally the stock is a bit extended and could well retrace a little bit. However, from a valuation point of view and attaching a moderate weight to a near-term deal between the two pharma giants we see further upside in the stock to about CHF 140.

TotalFinaElf SA (FP FP; EUR 172) held its annual strategy presentation in Paris. The company raised its target for 2003 operating profit, citing higher production and cost cut from its acquisition of Petrofina SA and Elf Aquitaine SA. TotalFinaElf plans to increase its production by 10% in 2002 to offset further declines in energy prices. Growth for 2003-2007 is forecasted to be 5% p.a.. We see significant cause for concern in the continued weak performance of the chemical unit. The chemicals business will be slower to restructure and will still feel the negative impact of the plant explosion last year. On the more positive side we believe that many elements of the TotalFinaElf equity story remain intact. The company will benefit from its growth upstream and is about to reap the fruits of restructuring downstream. The company said it had spent EUR 400 million to buy back shares and plans to rise its dividend by 15% to EUR 3.8.

Despite the positive news TotalFinaElf is now trading close to our price target of EUR 180 and has closed the gap in valuation multiples with other super-majors. Hence we reduce our recommendation to 'Hold' from 'Buy'. The tensions in the Middle East could boost oil stocks slightly higher from here, which we would use to take profits.

Nokia's (NOK1V FH; EUR 25.09) mid-quarter update and CEBIT presentation caused some disappointment in the telecom equipment sector. Nokia warned that 1Q02 sales would be below previous guidance mainly due to a decline in networks sales of about 25% YoY (guidance was looking for a decline of 16%-20%). However, the company maintained its 1Q02 and full year earnings guidance and said that 1Q02 earnings should be at the upper end or even slightly above the EUR 0.15-0.17 range due to better cost management and lower component prices. While we do not doubt Nokia's industry leadership we feel confirmed that the infrastructure weakness is likely to take well into 2003. Lucent's sales warning confirms this assumption. While we prefer Nokia to Ericsson and Alcatel we do expect the stock to remain in the range trading between EUR 24 and EUR 30.