EUROPE MARKETS: Drug Stocks Drive European Markets Higher

By Carla Mozee, MarketWatch

LONDON (MarketWatch) -- Drug makers took center stage in European trading Tuesday, with shares of AstraZeneca PLC climbing on news of a potential takeover bid, and GlaxoSmithKline PLC is rising as it sells one of its units in a multibillion-dollar deal.

The Stoxx Europe 600 jumped 1.3% to 336.75, as investors returned from a four-day Easter holiday break to a slate of developments in the pharmaceutical sector, the best-performing group on the pan-European index.

Topping U.K. equity advancers was AstraZeneca , with a 7% leap in shares following a Daily Telegraph report that the British drug maker has hired Goldman Sachs and Morgan Stanley to advise it if Pfizer Inc. (PFE) were to again attempt talks with the company about a takeover bid.

U.S.-listed shares of AstraZeneca surged 8.8% on Monday following a report by the Sunday Times of London that Pfizer -- the largest drug maker in the U.S. -- had approached AstraZeneca about a possible merger.

Stock in Novartis AG rose 2.3% as the Swiss company on Tuesday outlined changes in its portfolio lineup, including plans to buy GlaxoSmithKline PLC's oncology unit for about $14.5 billion. Novartis also plans to sell its vaccines unit to Glaxo for $5.25 billion. Glaxo shares climbed 5.5%.

Participating in the rise in drug stocks, Bayer AG picked up 3.7%, Hikma Pharmaceuticals PLC latched onto a 5% gain, and Danish firm Novo Nordisk AS (NVO) kicked higher by 3.2%.

Gains for Glaxo helped the U.K.'s FTSE 100 index rise 1% to 6,691.32. Germany's DAX 30 pushed 1.7% higher to 9,570.65, and France's CAC 40 index advanced 1% to 4,475.28.

Outside of deal news, Philips NV (PHG) fell 5.4% after the company's first-quarter profit fell 14%, and as it spoke of a "challenging start to the year." Net profit for the diversified technology group's first quarter fell to 138 million euros ($190.5 million) from EUR161 million in the year-ago period. Revenue fell to EUR5.02 billion from EUR5.26 billion a year ago, hurt on currency weakness.

Investors appeared to set aside news over the weekend about further unrest in Ukraine, with five people reportedly shot dead at a checkpoint near the eastern city of Slavyansk. The shootings came after the Ukrainian government said it wouldn't battle pro-Russian protestors who were occupying public buildings during the Easter holiday. U.S. Vice President Joe Biden in Kiev on Tuesday expressed support for Ukraine's new government, while the U.S. prepared new sanctions against Russia.

Heightened uncertainty about Ukraine has driven recent "risk off" market sentiment, but other, more fundamental "red flags" for equities -- including a rotation of market leadership, a rally in bonds this year and flattening of the yield curve, and weakness in copper and other commodity prices -- don't change the bullish backdrop for the market, said J.P. Morgan Cazenove in a report Tuesday. Earnings in the euro zone look likely to grow for the first time in four years, and the activity backdrop is "robust" in Europe and in the U.S., it said.

"In our view, equities remain attractively valued vs. other asset classes, and the inflows are steadily coming through," said analyst Mislav Matejka in the report, adding that they are "using dips as an opportunity to add further to Euro recovery plays" such as euro-zone banks, and value and cyclical stocks.

Data released Tuesday showed construction in the euro zone grew 0.1% in February, slowing from January's increase of 1.6%, according to data from Eurostat. Construction in February expanded 6.7% from a year earlier.

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