Drug-maker GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) has announced its third setback in almost as many days with news of failed drugs trials. The shares are down 3% since the start of the week. But that’s quite a muted response to three disappointments in GSK’s late-stage pipeline, which to my mind demonstrates the company’s robustness. I doubt rival AstraZeneca (LSE: AZN) (NYSE: AZN.US) could meet a triple failure with such equanimity.
Bad news comes in threes
On Wednesday GSK announced it had halted the last-stage trials of lung-cancer vaccine MAGE-A3. On Monday it withdrew an application for approval of an ovarian cancer drug called Votrient after disappointing Phase III studies. The day before it had released details of its unsuccessful trials of heart disease therapy darapladib.
This is not the end of the road for these drugs: trials will continue on their efficacy in different clinical situations. But it is a significant setback in GSK’s pipeline. GSK acquired darapladib with its $3bn acquisition of US biotech firm Human Genome Sciences in 2012 and it was considered one of its leading prospects. MAGE-A3 is an immunotherapy treatment which stimulates the body’s own immune system to treat cancer. It’s a field where GSK has been lagging — and still is.
People attach significance to events that come in threes: buses, accidents, bad news, profit warnings, whatever. Perhaps it’s because two things happening together isn’t unusual – just a ‘coincidence’ – whilst the laws of randomness make four events a rarer occurrence. My hunch is that similar triple disappointments at Astra would have sent its stock plunging on talk of its business model failing. AstraZeneca’s share price is supported by faith in the company delivering on its ambitious pipeline, a balloon that could easily burst.
Less risky than Astra
That, in a nutshell, is why I hold GSK but no longer hold Astra. GSK has lower downside risk. It has largely overcome the patent cliff. Turnover has stabilised, with two new asthma and respiratory drugs hopefully replacing sales from the company’s blockbuster product Advair. In contrast even Astra’s own CEO doesn’t expect to see sales recovering until 2017: the longer time frame means more uncertainty.
GSK also has two business lines less susceptible to the uncertainties of scientific discovery. Conventional vaccines and consumer healthcare, such as over-the-counter medicines, make up a third of turnover.
GSK has the largest vaccines business in the world, and whilst it’s managed alongside the pharmaceuticals business it doesn’t require the same massive upfront R&D investment. The consumer healthcare market is driven by ageing populations in the developed world and increasing wealth in emerging markets, just like the pharmaceuticals business is. But its characteristics are more like a consumer goods company than a drugs company.
Cheaper than Astra
Remarkably, in the light of its lower risk, GSK is actually now cheaper than Astra: on a forward PE of 14.4 against 15.3, and yielding 4.9% against 4.5%. It could be a good time to prescribe a dose of GSK shares to inoculate against pension poverty!