There’s a lot to like about gargantuan pharmaceutical company GlaxoSmithKline (LSE: GSK) and I’m attracted to the share as a long-term investment. With its market capitalisation at just over £77bn, the firm is a big player in the sector. In general, I reckon the pharmaceutical industry is a decent place to invest if you are after ‘defensive’ companies capable of generating steady and repeatable cash flows, ideal for financing reliable dividend payments.
Trading figures on the mend
GlaxoSmithKline’s trading figures wobbled a bit during the first half of this decade because of the company’s well-reported challenges regarding patent expiry. Some of its best-selling products came out of patent protection, which opened up the market to a flood of cheaper generic alternatives. Cash flow and profits declined, but earnings now seem to be back on track and growing steadily from year to year, and cash inflow has stabilised. Throughout the difficult period of the past few years, the company maintained its dividend and the shares traded in a range between 1,000p and 1,700p.
To me, today’s share price around 1,577p offers good value considering that the trading figures appear to be on the mend. At the end of July, chief executive Emma Walmsley announced a restructuring programme aimed at improving the competitiveness and efficiency of the cost base with savings delivered “primarily through supply chain optimisation and reductions in administrative costs.” Such initiatives and ongoing new product releases from the research and development pipeline look set to drive decent investor returns from here.
However, I’m also keen on international veterinary pharmaceutical business operator Dechra Pharmaceuticals (LSE: DPH), which released its full-year results today. Whichever way I look at them, the figures are good. Constant exchange rate revenue moved up almost 14% compared to last year and underlying diluted earnings per share shot up nearly 21%. Indeed, the directors underlined their confidence in the outlook by pushing up the total dividend for the year by almost 19%.
Facing off the competition
So why has the share price fallen a little over 15% today? I suspect the answer to that question can be found in the report under the heading ‘Market Changes’. According to the firm, the veterinary market “is seeing faster change than at any time in its history.” There’s increasing consolidation of veterinary practices and veterinary distributors into larger entities. These enlarged distribution businesses are selling more of their own products and, on top of that, the leading US supplier has moved onto Dechra’s ‘patch’ in the UK and mainland Europe. In a nutshell, Dechra faces more competition than it has been used to.
However, the firm’s vibrant research and development pipeline should work alongside an active acquisition programme to keep the firm competing in the market. The directors said in today’s report that the company is “well positioned” to serve the needs of the larger veterinary practice firms that are emerging alongside independent practices. Dechra has “the flexibility to respond quickly”to any ongoing changes within the distribution network.
Indeed, today’s figures are encouraging and the new trading year has started well. The directors expect the firm to “continue to outperform.” On balance, I reckon today’s share-price wobble could soon be forgotten as ongoing growth in earnings shines through in the years to come.
