A clear trend that is as apparent whether you live in Rome, Delhi or Mexico City is that people are living longer. This means that, over the next few decades, we will be living in an ageing world.
And as the wealth of the world, particularly the developing world, increases, much of this wealth is being spent on rising healthcare costs.
Looking beyond the patent cliff
Yet in recent years there has been a lot of negativity about healthcare companies such as GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) because of concerns about the so-called ‘patent cliff’ — the fact that the patents of many of the chemical-based drugs that healthcare companies currently sell will soon expire, leading to tumbling profitability.
Although this may be the end of the chemical drugs era, I think the healthcare industry has much to look ahead to.
The future may bring us healthcare treatments tailored to our genetic makeup. It may bring us a range of diagnostic tools to predict what illnesses we will suffer from. It may bring us organs grown in the laboratory, and drug treatments to all forms of cancer.
The industry’s most successful innovator
But to take us from here to there will require a high level of creativity, innovation and hard graft. Of all the pharma companies, I think GSK has cracked research and is perhaps the most successful innovator.
This has resulted in a buzzing drugs pipeline and profitability, which — patent cliff or no patent cliff — is set to increase in the next few years.
GSK is making advances in areas as varied as epigenetics, bioelectronics and antibiotic resistance. It seems to both generate ideas, and, crucially, turn many of these ideas into real-world products.
Contrast this with AstraZeneca, which is losing exclusivity on a range of drugs, including blockbusters such as Seroquel, and has a relatively disappointing drugs pipeline. This company’s strategy seems to be shifting from research to acquisitions.
As the market has cottoned on to GSK’s successes, the share price has been rising steadily. Yet, even now the company has a P/E ratio which is near or just under the market average, with a juicy dividend yield to boot.
Thus, although the share price has already risen a lot, I would rate this company’s shares a buy. The business provides a high and rising dividend, with the likelihood of share price growth as well.