The pharmaceutical sector is one of the most defensive sectors around, and I think investors should always have some exposure to this essential industry in their portfolio.
The UK’s two leading pharma companies are GlaxoSmithKline (LSE: GSK) and AstraZeneca (LSE: AZN), and while both of these companies operate in the same sector, they have very different outlooks.
The diverging expectations of these two pharmaceuticals can be seen their year-to-date stock performances. Indeed, since the beginning of the year shares in Glaxo have risen 7.6% excluding dividends, outperforming the FTSE 100 by around 8.9%. On the other hand, shares in Astra have lost 14.1% excluding dividends, under-performing the FTSE 100 by 12.8% and under-performing Glaxo by a staggering 21.7%.
And it’s more than likely that this performance will continue throughout the rest of the year. You see, even though 2016 is not quite four-and-a-half months old, Glaxo has made good on its promise to return to growth this year. In fact, the first quarter of 2016 was one of the most impressive in several years for the company.
Glaxo: charging ahead
During the first quarter, Glaxo’s sales increased by 11%, to £6.23bn. Earnings per share, excluding exceptional items and adjusted for currency, rose 8% to 19.8p ahead of City forecasts that were calling for earnings per share of 18.2p.
Growth in HIV drugs, vaccines, and consumer healthcare helped offset a further decline in respiratory medicines, while cost cuts and restructuring contributed to improving profit margins across the group. Management reiterated its target for earnings per share growth of 10%–12% for 2016.
Astra: uncertain times
Astra’s first quarter results presented a much more complex picture. Core operating profit fell by 12% to $1.6bn and revenues increased by 1% to $6.13bn. Research spending was to blame for most of the decline in profit. However, profits were flattered by $646m as a result of lower amortisation charges and externalisation deals that raised $550m.
A looming cloud for Astra is the fact that it’s set to lose exclusive manufacturing rights for its leading Crestor drug this year. As yet, it’s impossible to tell how much the loss of these exclusive rights will cost the company.
Astra’s management has predicted that revenue and earnings per share will drop by a low-to-medium-single-digit percentage as a result of patented explorations, but this is only an estimate. We won’t know the exact figures until 2016 comes to an end, and by then it could be too late for investors.
The bottom line
So overall, Glaxo is growing steadily, and 2016 is set to be a transformational year for the company. Meanwhile, 2016 is also set to be an important year for Astra, as it’s the year the company will find out how quickly sales of Crestor will be eroded by generics.
With this being the case, Glaxo seems like the safer option. The company’s shares currently trade at a forward P/E of 16.2 and support a dividend yield of 5.7%.