The appeal of investing in pharmaceutical stocks is obvious: patent protections that last for years, sky-high margins that more than recoup the expense of drug development and, for many drugs, huge addressable markets the world over. On the flip side, investing in pharma stocks can also go horribly wrong for shareholders. This is due to the hit-or-miss and incredibly expensive and time-consuming process of getting drugs to market entailing R&D, clinical trials and regulatory approval.
This is exactly why GlaxoSmithKline (LSE: GSK) is the only pharma stock I’d ever own. Unlike peers such as Shire or AstraZeneca, which are pureplay pharma companies with all the upside and downside that entails, GSK offers exposure to the benefits of the sector, while cushioning the drawbacks with profitable, steady-as-she-goes divisions selling vaccines and consumer healthcare staples such as toothpaste and pain relief tablets.
In H1 2017, these non-pharma products accounted for 42% of group revenue and were actually growing quite nicely. Vaccines revenue was up 23% year-on-year (y/y) and consumer healthcare sales up 13% y/y at actual exchange rates, which were helped considerably by the weak pound.
On top of the steady growth from these divisions, GSK investors also gain access to the company’s array of top-notch pharma products. The company’s respiratory treatments brought in £3.4bn in sales in H1 and are growing nicely, while new HIV treatments were going gangbusters with sales up 32% y/y to £2.1bn.
The combination of steady growth from the non-pharma products with the potential of new pharma blockbusters has proven to be a winning combination, with group sales up 14% y/y in H1 at actual exchange rates and 4% on a constant currency basis. The company’s management team is also putting an increased emphasis on increasing profitability, which is paying off already with adjusted operating margins rising to 27.6% in H1.
Furthermore, with its shares trading at a sedate 13.5 times forward earnings while kicking off a safely-covered 5.3% dividend yield, GSK is priced as a value stock while offering considerable long-term growth potential that only adds to my interest in this relatively safe pharma pick.
A high-risk, high-reward option?
One pureplay pharma stock that exemplifies the roller coaster ride investors can be in for is Vernalis (LSE: VER). The company has spent heavily in recent quarters in preparation for launching its first cough and cold treatments in the massive US market. In the year to June, investments in a large sales staff were beginning to bear fruit with American revenue rising from £1.1m to £2.1m y/y.
Unfortunately, even though the volume of prescriptions for its drugs in the US is rising rapidly, the revenue has yet to translate into bumper profits. Indeed, during the year, pre-tax losses rose to £21.6m from £17.1m in 2016, reflecting both operating expansion into the States and pressure from generics on a European partner’s product sales. For the time being this isn’t a huge worry as the £61.3m of cash on hand at the end of June will cover several years of expansion.
However, while the growth prospects for its American sales are high, investing in a £100m market cap, heavily lossmaking pharmaceutical company is not for risk-averse investor or those like me who don’t know the ins and outs of the drugs and their market like the back of their hand.
