A short rally, but uncertainties on fundamentals remain over the short term (page 2 of 2)

With the current book-to-bill ratio of close to one and the low visibility into the recovery of the IT spending for enterprises, this optimism deserves scrutiny. We would be cautious on the hardware side of the IT business over the near term, as fundamentals for the sector remain challenging. Orders might have been stabilising over the last quarter, but a real recovery would only be supported by a solid economic growth.


The general market reaction we saw after the earnings release of Cisco Systems, where the broad market started to rally, however looked more like short covering, than buying into strength. And the rally already started to run out of steam in Friday's trading session. We believe that there are to many economic data points, like the ISM manufacturing and non-manufacturing, that have deteriorated recently to underpin this last weeks rally. These numbers would have to improve again, in order to make the case for a recovery in IT spending and give reason for a sustainable upside in technology stocks.

European Equities

We had mixed news moving the market during the week. For the pharmaceutical industry Aventis disappointed, as the company announced it would end the development of a new hypertension treatment currently in phase 2, which was expected to be launched in 2006 and reach potential sales of between EUR500 million to EUR2 billion. This would have been an important drug to compensate the declining sales of its allergy drug Allegra, which went off patent and faces generic competition. But in the medium term the risks for Aventis remain moderate, as the growth in products currently on the market should sustain the expected growth for the company. It was not all negative for the pharmaceuticals, as Sanofi-Synthelabo won a new patent for its marketed coagulation inhibitor Plavix, the company's No2 drug, which active agent has been slightly modified.

This extends the protection from generic competition until 2019. Today Sanofi-Synthelabo announced that it also got the FDA approval for Eloxatin, its new chemotherapy treatment for advanced colon cancer. The FDA apparently reviewed the medicine in just 46 days, which is surprisingly quick. But this product was already filed once in 2000, and failed approval as the study did not go far enough in proving the drugs benefits. So this time the FDA had just to review a couple of additional figures. Eloxatin is expected to reach annual sales of EUR450 million or more, as there are not many effective treatments for advanced colorectal cancer on the market.

The Swiss company Novartis also filed a new drug with the FDA, called Lescol, a cholesterol lowering agent. Novartis expects a potential market of 1.8 million patients a year and will be filed in Europe as well in the coming months. The drug will be used to prevent cardiovascular attacks for patients who have undergone cardiovascular surgical interventions. There has been no drug of the same type, which filed for this application. Hence, this gives Novartis a good opportunity to boost sales if the filing is successful.