2014 has been one of those years when stock pickers, whether they be fund managers or small investors, have been confounded time and again. And the pharmaceutical industry has been no exception.
If you were to ask investors at the beginning of the year whether you should invest in GlaxoSmithKline (LSE: GSK) or AstraZeneca (LSE: AZN), I think most would have picked the former rather than the latter. After all, GSK was an incredibly innovative company with the strongest drugs pipeline in the industry, while AZN faced a steep patent cliff, as many of its blockbuster medicines lost patent protection.
Stock pickers have been confounded
But fast forward to the end of the year, and we find that AstraZeneca’s share price has risen from 3585p to 4555p, an increase of some 27%, while GlaxoSmithKline has fallen from 1604p to 1376p — a decrease of 16%. So while GlaxoSmithKline, once the darling of the pharmaceutical industry, has had a terrible year, AstraZeneca’s fortunes have been turned around.
Glaxo’s experiences perhaps demonstrate that an impressive drugs pipeline won’t necessarily translate into rising profits. New drugs such as Breo and Anoro have failed to live up to initial sales expectations, while profits from established treatments such as Advair are falling. What’s more, the China bribery scandal has tainted the company’s reputation in one of its fastest growing markets.
In contrast, AstraZeneca, which had an awful 2013, has seen its profitability recover: it is past the worst of the patent cliff, and saw off Pfizer‘s hostile takeover bid in some style, safeguarding a key part of the UK’s science base. And chief executive Pascal Soriot is now working on the next stage of the healthcare firm’s recovery, with the aim to grow profits by focussing on innovation and targeted acquisitions.
I am broadly optimistic about both companies
The business’s biomedical campus in Cambridge, which brings together biotechnology and the latest discoveries with more traditional research, is a sign of the bright new future the pharmaceutical industry is now looking towards. The fact that this company’s share price has now reached the level of Pfizer’s first bid is vindication of Soriot’s approach.
The business is now fully valued, with a 2014 P/E ratio of 16.6, and a dividend yield of 3.9%. I agree with the market’s optimistic view.
If I am positive about AstraZeneca, I am also broadly optimistic about GlaxoSmithKline. With a P/E ratio of 14.6, falling to 14.0, and a dividend yield of 5.8%, the company is cheaper than its rival, and its alliance with Novartis is starting to yield dividends. I think 2015 will be a year of consolidation and recovery.
Both companies will benefit from the growing healthcare business in emerging markets, and improving developed markets, and I rate them as buys in 2015.