UK drug sector’s top stock named

AstraZeneca has been given top pick status after a City bank said the shares are at a compelling entry point in a sector that should provide insulation from tariff risks.

The review of European pharmaceuticals by Morgan Stanley said AstraZeneca (LSE:AZN)'s under-appreciated growth and drugs pipeline meant shares deserved to be valued 25% higher at 14,500p. That’s the same position as Bank of America, which also named Astra as its industry top pick today.

Morgan Stanley expects Astra to deliver sector-leading earnings growth over 2025-28, with its more optimistic view on the pipeline set to underpin longer-term upside.

• Our Services: SIPP Account | Stocks & Shares ISA | See all Investment Accounts

It is much more cautious on GSK (LSE:GSK), where limited catalysts and continued uncertainty in the US and China vaccines market have contributed to an underweight recommendation.

Looking across the wider sector, the bank said European pharma offered above-market growth at a low-valuation premium compared to historical trends.

It notes that a multiple close to a 10-year low at about 15 times forward earnings is in line with wider European markets, whereas the sector has typically traded at a 15-20% premium.

Pharmaceuticals has been flagged as an area where tariffs could be imposed, but the bank believes this is far from certain as it would impact on US healthcare affordability.

Among other changes under a Trump administration, a looser regulatory framework on M&A could be beneficial as European companies execute on business development.

• Stockwatch: time to buy these two blue-chip shares?
• AstraZeneca recovery continues after results boost
• GSK annual results get warm reception

With the sector’s fundamentals intact, the bank favours stocks offering growth, momentum and innovation. This underpins top pick status for AstraZeneca and life sciences firm Sartorius AG (XETRA:SRT).

Astra shares rallied last week after it reported a “very strong performance” in 2024 and chief executive Pascal Soriot reiterated a target for revenues of $80 billion (£65 billion) by the end of the decade.

He said the company was at the start of an “unprecedented, catalyst-rich period”, with late-stage trial results due for seven new medicines in 2025.

The shares touched 11,900p after the results but have since fallen back, despite the company quelling concerns around the potential impact of ongoing investigation by Chinese authorities. Astra indicated it faces a possible fine over unpaid import taxes in Shenzhen.

Shore Capital, which has a fair value estimate of 15,000p, said 2025 will be a particularly noisy year for Astra due to a plethora of pivotal drug readouts that could support the long-term $80 billion revenue ambition.

These include Phase III trial results for breast cancer treatment Enhertu and Breztri for severe uncontrolled asthma.

The bank expects Astra to repeat its pattern of upgrading guidance throughout the course of 2025.

It added: “We continue to see a quality growth story, underpinned by its broad blockbuster base and an enviable pipeline.”

Shore Capital also remains supportive of GSK in the wake of last week’s results, when chief executive Emma Walmsley targeted 2031 sales of more than £40 billion. This compared with the company’s previous guidance of £38 billion amid progress in its late-stage drugs pipeline.

• The Income Investor: upbeat about this FTSE 100 dividend stock
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis
• Stockwatch: time to back this roller-coaster cyclical?

GSK also announced plans to increase the 2025 dividend alongside a £2 billion buyback of shares over the next 18 months.

The shares have surrendered some of the results-day gains, reflecting the City’s ongoing frustration over a run of downgrades for the Shingrix and Arexvy vaccines division.

The shares, which were 1,800p in May before falling as far as 1,300p last month, stood at 1,425p this afternoon. Shore continues to have a fair value estimate of 2,100p, believing that forecast compound earnings growth of 10% in the period up to 2027 is under-appreciated.

The bank said: “Clearly it needs evidence it has stemmed the flow of cuts to Vaccines, but the flourishing Speciality Medicines portfolio does look well positioned to drive revenue growth and improve leverage over the near to medium term.”

However, Morgan Stanley believes continued uncertainty in the US and China vaccines market may offset potentially favourable new launch momentum elsewhere in the portfolio.

Its cautious outlook for GSK's pipeline drives long-term sales forecasts below company guidance, with the bank looking for sales of £35 billion by 2031.