Today I’m weighing up whether GlaxoSmithKline (LSE: GSK) or Smith & Nephew (LSE: SN) is the better FTSE 100 (INDEXFTSE: UKX) medical pick for savvy stock pickers.
Testing times
Make no mistake: the business of drugs development is a hugely-risky affair, where testing setbacks can lead to lost millions in the case of product delays and cancellations, not to mention a hefty rise in R&D costs.
And for ‘Big Pharma’ plays like GlaxoSmithKline this is a particular problem. The Brentford firm has seen earnings steadily sink during the past five years as key labels have lost patent protection. So bringing on-stream the next generation of sales drivers is critical to get earnings firing again.
GlaxoSmithKline has plans to submit 40 products for regulatory submission during the next decade, around 80% of which the firm believes can lead the industry in their respective fields. However, the scrapping of its IONIS-TTR cardiovascular treatment on safety grounds last month illustrates the hit and miss nature of pharmaceuticals production.
Joints joy
Limbs-and-joints manufacturer Smith & Nephew doesn’t face the same level of unpredictability when it comes to product development, of course. But that’s not to say the bio engineer doesn’t face revenues issues of its own.
Indeed, Smith & Nephew saw sales in emerging markets slump 6% during January-March as uptake from China and the Middle East dived. And prolonged weakness in these critical growth regions could significantly hamper the medical giant’s long-term growth story.
But I believe there’s still plenty to get excited about. Smith & Nephew’s robust position in fast-growing segments like sports medicine continues to generate splendid returns, while acquisition activity is also bolstering the firm’s position in other key areas.
So what does the City think?
The number crunchers certainly believe that Smith & Nephew is in good enough shape to keep earnings growing, and rises of 1% and 12% are pencilled-in for 2016 and 2017, respectively. These produce decent-if-unspectacular P/E ratings of 18.8 times and 17 times.
By comparison, GlaxoSmithKline boasts P/E ratings of 15.6 times and 15.1 times for these periods as earnings are expected to spark again — growth of 16% and 5% is expected this year as analysts put faith in the drugs developer’s product pipeline.
Sure, GlaxoSmithKline may carry a higher risk profile than Smith & Nephew. But I believe both firms have the know-how to deliver splendid earnings growth in the years ahead, particularly as global healthcare investment keeps on surging.
Having said that, dividend chasers may find themselves drawn in by GlaxoSmithKline’s gigantic yields — the City expects the pharma play to make good on planned dividends of 80p per share for this year and next, creating a monster 5.7% yield.
In contrast, Smith & Nephew carries yields of only 2% and 2.2% for these periods thanks to predicted rewards of 21.9p and 24.4p per share.