So the heyday of the pharmaceutical industry is over. Many blockbuster drugs have tumbled over the patent cliff, and there are now a range of ‘me-too’ drugs which produce a fraction of the revenues of the big drugs of yesteryear.
This is what many investors think, and there is much truth in this. But if you heard the news in recent weeks of a series of cancer drugs which combat this terrible disease through the immune system, then you will know there is a future for pharma. Antibody-based drugs, stem cell science and vaccines are some of the ways this sector can find new paths to growth. However, I think investors should invest carefully when they buy into these businesses, as much of the low-hanging fruit has long ago been picked.
AstraZeneca’s fortunes have been transformed
So which of the drug companies should you buy into? Much has been written about UK pharma stalwarts AstraZeneca (LSE: AZN) and GlaxoSmithKline (LSE: GSK). AstraZeneca was, a few years ago, seen as the laggard of the sector, with a whole series of patent expiries taking place over the past few years.
But chief executive Pascal Soriot has transformed this company, making it more forward looking, and it has a big stake in those money-spinning anti-cancer drugs. For this reason, the fall in profitability has reversed, and AstraZeneca’s share price has been rising.
But actually, this company is off its highs, and is still reasonably priced. The 2015 P/E ratio is 14.93, with a dividend yield of 4.60%. The 2016 P/E ratio is 15.95, with the dividend yield rising to 4.77%.
GlaxoSmithKline is no longer the darling of the sector
Compare this with GSK. This firm was the darling of the pharmaceutical industry a few years ago, with much written about what was thought of as one of the best drugs pipelines in the sector. The share price rose to 1750p, and many shareholders, including myself, made a healthy profit. But I was a little sceptical about how much higher the share price could go, and so I sold just short of the peak.
Soon afterwards, the company was caught up in the Chinese bribery scandal, and investors started to realise that what should have been blockbusters were mainly niche art house numbers. The rapid rise in profitability hasn’t happened, with earnings per share in 2016 likely to be little different from those in 2012. And so the share price has been falling.
At 1338p, GlaxoSmithKline looks a lot cheaper. How does it compare with AZN? Well, the 2015 P/E ratio is 15.23, with a dividend yield of 6.08%. And the 2016 P/E ratio is 14.49, with a dividend yield of 6.02%.
Taking a strictly contrarian view, if AstraZeneca’s share price has risen a lot, it should be time to sell. And GSK’s sinking share price should mean it is time to buy. Except I don’t think it’s as simple as that.
My view is that it is now Astra that has the stronger drugs portfolio. Its strength in anti-cancer drugs particularly impresses me. That’s why I think you should buy AstraZeneca and sell GlaxoSmithKline. I guess Astra just happens to have chanced upon the best balance of strategic vision and good, old-fashioned luck.
