The FTSE 100 company accounted for a whopping 15.1% of all buy orders on the Youinvest platform in the seven days to 18 October.

Demand for GSK shares was far ahead of that of second-placed Legal & General. The life insurer accounted for a much lower 6.4% of all buys in the past week.

If I had cash to spare, I’d buy it for my own shares portfolio. Here I’ll explain why.

Safe haven

I think stocks like GSK are some of the best ways that investors can protect themselves from economic crises. Spending on prescription medications is one of life’s non-negotiables, after all.

This resilience is perhaps why AJ Bell investors are piling into the healthcare business today. City analysts expect earnings here to rise 15% in 2022 and 10% next year. The profits outlook for most other UK shares is much more uncertain as the global economy cools.

The cheapness of GSK shares could be another reason why it’s in high demand right now. Today it trades on a forward price-to-earnings growth (PEG) ratio of just 0.7. A stock is considered undervalued if it trades on a reading below 1.

On top of this, GSK also offers plenty of value from a dividend perspective. Its forward yield of 4.2% crushes the corresponding 2.6% yield of fellow large-cap pharma stock AstraZeneca.

Risky business

As a fan of value stocks, GSK ticks important boxes for me. But I do have concerns about buying the business today.

The task of successfully developing drugs is complex and costly. The huge sums required can drain any cash a company might be intending to return to shareholders.

Problems at R&D stage can also cost a fortune in extra expenses and lost revenues. In some cases, launch delays can last years, and medicines may be scrapped altogether.

The spinning off of its Haleon consumer healthcare operations leaves GSK’s profitability even more dependent on the unpredictable business of drugs development too. Products like Sensodyne toothpaste and Panadol painkillers once provided reliable revenues streams to the company.

An industry heavyweight

On balance, however, I think investing in GSK shares today is a good idea.

The business has a tremendous track record when it comes to drugs development. Products like its big-selling HIV medicine Triumeq make the business one of the top 10 biggest pharmaceuticals developers in the world.

Encouragingly GSK has a packed development pipeline across fast-growing therapy areas like infectious diseases and oncology. As of June it had 21 treatments at the late Phase III testing stage.

Demand for medicines is tipped to soar as healthcare spending in emerging regions accelerates and the global population increases. I believe GSK is one of the best stocks to buy to capitalise on this theme. And I think it’s a particularly attractive share at current prices.

Which companies benefit from a strong dollar?

Several FTSE shares earn large portions of revenue in $USD. Furthermore, when dividends are paid out in $USD, they are worth more to investors when they are inevitably converted back to £GBP. This could boost such dividends by 10-20%.

However, if a company’s main manufacturing operations are outside the US, for example, then the currency markets will work against them. So, here are my top two picks for capitalising on potentially boosted dividends.

Dividend growth potential

The share price of 4imprint Group (LSE:FOUR) is up almost 20% year to date.

As I write, 4imprint’s payout ratio is low. This means earnings are easily covering investors’ dividends. Interim earnings this year for the supplier of custom promotional merchandise grew to almost $1bn. Profit margins grew too, and analysts expect earnings per share to grow by 27% over the next two years.

Over 90% of 4imprint’s revenue comes from the US. Also, a large portion of its manufacturing occurs in the US, with blank products being purchased from Chinese suppliers.

So, it seems most of the group’s transactions will benefit from a stronger dollar, especially £GBP dividend payments. The dividend yield currently stands at around 2%.

I think this has the potential for significant growth going forward, which is why I will be buying these FTSE shares for my portfolio in the coming days.

However, demand for marketing and promotional products does decrease during times of economic hardship. This could impact 4imprint’s revenue if its services aren’t deemed essential.

A dividend legend with big stakes in the US dollar

The current dividend yield for GSK (LSE:GSK) is much higher, at over 7%, and has a very reliable track record. Since 2015, the company have almost always exceeded an annual dividend yield of 5% for its investors.

Earnings grew by 16% for the pharmaceutical giant over the past year, and analysts predict them to grow by around 10% next year. GSK is one of the biggest players in the FTSE 100 and has very diversified international operations. Over one-third of its revenue is $USD.

Ahead of its Q3 results, GSK expects a 10% tailwind to its revenues. Earnings per share over the period are expected to increase by 12% from these favourable currency fluctuations.

However, the company does have a high ratio of debt to equity, which isn’t favourable in a climate where interest rates are surging.

Still, the high and reliable dividend yield is hard to resist especially with currency tailwinds. I’ll be keeping an eye on the GSK share price as a result, with a view to adding it to my portfolio in the near term.

A smoking hot yield

The first company, Imperial Brands (LSE:IMB), has a dividend yield of 7.26%. For the year ended September 2021, the tobacco firm paid a total dividend of 139.08p. The shares are trading at 1,903.5p.

For the six months to 31 March, the business reported that revenue fell by 1.3% and operating profit declined by 26.6%.

This is an indication of how wage and cost inflation are beginning to impact the company’s balance sheet. But I do consider this a short-term issue.

In the same report, net debt was down from £11bn to £9.7bn. This suggests that the firm is becoming leaner and increases the possibility of expansion projects, given the lighter debt pile.

Additionally, it paid an interim dividend of 42.54p per share, a 1% increase year on year. 

The business has been focusing on investing in its sales across the UK, US, and Australia. In these regions, it’s seen 0.25% growth in aggregate market share.

What’s more, the firm has operating cash flow of £2.63bn, meaning that it should be able to overcome any issues that arise in the short term.

Solid sales growth

Second, GSK (LSE:GSK) paid a total dividend of 80p per share in 2021, amounting to a dividend yield of 7.42%. The shares are currently trading at 1,330.2p.

For the three months to 30 June, the pharmaceuticals firm announced that sales increased by 13%. This amounted to £6.9bn.

Furthermore, adjusted operating profit grew by 22% to £2bn. The business also stated that it was lifting its full-year guidance, while expecting full-year sales to grow between 6% and 8%. This growth, though, isn’t guaranteed.

As a potential investor, I find these recent results exciting and indicative of good times ahead for the company. These results come after the public listing of GSK’s consumer healthcare segment, Haleon. 

GSK is, however, fighting litigation involving personal injury claims. These concern the Zantac heartburn drug. This case could potentially cost $17bn, but Citi says legal developments may reduce the firm’s exposure. The amount may be significantly less than this.

In any case, the business has operating cash flow of $10.51bn. This should enable the firm to sail through any difficulties that may arise from the litigation. 

Overall, both of these companies are well-established and boast attractive dividend yields. Both are focused on expansion, which I consider appealing. As such, I’m going to take my £500 and buy the shares of both companies to target an income stream through dividends. I’ll be adding the shares to my portfolio soon.

Part of that plan involves reinvesting the dividends that I receive. But I also have new money to use in buying stocks in September.

This month, I have around £1,000 to invest. There are two dividend stocks that have caught my eye in my quest to generate lifelong passive income.

Federal Realty Investment Trust

At the top of my list at the moment is Federal Realty Investment Trust (NYSE:FRT). This is a real estate investment trust (REIT) that makes money by leasing retail space to its tenants.

In order to facilitate its growth, Federal Realty has increased its share count by around 25% over the last decade. This is the main drawback with the stock.

As I see it, though, this is a small downside for a very good company at an attractive price. Federal Realty is a dividend king, meaning that it has raised its distribution to shareholders each year for the last 50 years. 

I think it’s worth taking a moment to think about what that entails. It means that the organisation increased its payouts following the 9/11 attacks, the 2007/08 financial crisis, and the global pandemic.

This demonstrates to me that the company finds ways to move forward even in difficult times. In an uncertain economic and political environment, I think that this consistency is valuable.

Over the last month, the stock has fallen by just under 5%.

As a result, the dividend yield is now over 4%, which I find very attractive.

GSK

I’m also looking at GSK (LSE:GSK) as a passive income opportunity. I don’t usually invest in pharmaceutical stocks, but I think that this one is just too cheap for me to ignore at the moment. 

Shares in GSK have fallen by almost 19% over the last month. This is because of a lawsuit concerning potentially cancerous side-effects of Zantac, a heartburn medication.

So far, the Zantac litigation issues have caused GSK’s market cap to fall by about £30bn. To my mind, that looks far too extreme.

I was reading the other day that settlements for drug side-effects tend to be in the region of $2bn-$7bn. I take this to mean that a £30bn decline in market cap is pricing in the very worst.

More generally, though, I also don’t think that the legal issues are likely to have an enduring effect on GSK’s business. The company’s competitive position is supported by patents and intangible assets that have nothing to do with Zantac (which is available without prescription). 

Of course, there’s a risk that the lawsuit could come out worse than I’m anticipating. But I think that the market’s pricing of the stock at the moment is factoring in the worst.

At current prices, GSK looks like a buying opportunity to me. So I’d look to add shares while the dividend yield is above 4%.

[Just beginning your investing journey? Check out our guide on how to start investing in the UK.]

GSK 

What it does: GSK is one of the world’s top 10 largest pharmaceuticals producers thanks to drugs like Tivicay and Advair. 

By Royston Wild] 

The GSK (LSE: GSK) share price has plummeted during the past month amidst fears over stinging legal action in the US. It is believed a swathe of lawsuits related to its Zantac heartburn treatment could cost it billions of dollars. 

However, I believe the threat of such colossal damages is now well baked into GSK’s share price. I’d buy the FTSE 100 business owing to its exceptional defensive qualities. The essential nature of its operations should help profits to remain robust even as the global economy toils. 

In fact, latest financials show that the pharma giant is actually going from strength to strength. Total sales rose by almost a fifth between April and June, to £6.9bn. 

City analysts have been upgrading their profits forecasts following the news. They now think GSK’s earnings will rise 10% year on year in 2022 and 8% next year, too. 

This means that today GSK trades on a forward P/E ratio of just 11.4 times. I think this represents super value for money for this growth stock. 

Royston Wild does not own shares in GSK. 

Melrose Industries

What it does: Melrose Industries is a holdings business that seeks to acquire and improve struggling engineering firms.

By Zaven Boyrazian. Melrose Industries (LSE:MRO) is a holdings company. The group acquires underperforming engineering businesses intending to turn them around before selling them on at a higher price. But the engineering sector, especially aerospace, hasn’t exactly had a great time since early 2020.

Fortunately, now that the travel sector is ramping back up, Melrose’s future looks much brighter. The company has an excellent track record of delivering successful turnarounds. And assuming it hits its margin targets, earnings should be set to swell over the coming years.

There is an undesirable £1.7bn of debt equivalents on the balance sheet that is likely to become more expensive to service as interest rates get hiked. But with just over £470m of cash in its war chest, I see no immediate solvency risk.

That’s why I believe Melrose stock has some solid growth potential as it recovers to its former glory.

Zaven Boyrazian owns shares in Melrose Industries.

JD Sports Fashion

What it does: JD Sports Fashion sells sports fashion and outdoor footwear and apparel. 

By Paul Summers: I can understand retail stocks not being popular with investors right now. Even so, the near-halving of growth stock JD Sports Fashion (LSE: JD)’s share price in 2022 feels a bit overdone. 

Yes, not many people will be loading up on pricey trainers in the current environment. And, yes, being forced to sell Footasylum for less than half the price it paid to acquire it due to concerns from the UK’s competition watchdog won’t have boosted investor confidence. New CEO Regis Schultz has his work cut out.

Still, I reckon there’s a good brand here. A price-to-earnings (P/E) ratio of nine could also prove excellent value if JD meets its own conservative earnings estimates when half-year numbers are announced on 22 September. Encouragingly, there’s no interest from short sellers as things stand.

I suspect JD will deliver the goods again once confidence returns.

Paul Summers has no position in JD Sports Fashion

Sage

What it does: Sage is a leading provider of cloud-based accounting and payroll solutions for small- and mid-sized businesses.

By Edward Sheldon, CFA. My top growth stock is Sage (LSE: SGE). To my mind, it offers growth (and quality) at a reasonable price.

Sage’s most recent trading update, for the nine months to 30 June 2022, showed that the company is generating solid growth right now. For the period, recurring revenue was up 9% to £1,330m while organic total revenue was up 6% to £1,412m. Looking ahead, the company said that it now expects organic recurring revenue growth for this financial year to be towards the top end of its guidance range of 8-9%.

As for the valuation, Sage currently trades on a price-to-earnings (P/E) of around 26 (using next financial year’s projected earnings). That is higher than the average FTSE 100 P/E ratio. However, I don’t think it’s excessive given that Sage is a high-quality software company with recurring revenues.

Of course, this company is not without risk. One issue to consider is that new competitors are popping up. Overall, however, I think the stock has considerable appeal right now.

Edward Sheldon owns shares in Sage.

Rolls-Royce Holdings

What it does: Rolls-Royce is a British-based multinational aerospace and defence company that’s been struggling since the pandemic.

By Dylan Hood. Rolls-Royce (LSE:RR) shares have struggled to gain any real momentum since the onset of the pandemic. Currently sitting at 80p, they have fallen 37% year-to-date and 30% over the past 12 months. However, earlier this year, Rolls released results which highlighted the firm had turned a profit for the first time since its £4bn loss in 2020.

In addition to this, its more recent H1 2022 results revealed a record order intake for Power Systems and a momentous £1.1bn improvement to cashflows. The firm is also leading the charge in small to medium nuclear reactor technology and has already signed contracts with governments around the world to implement this technology after their approval (expected in 2024).

Finally, as the threat of the pandemic becomes less prevalent, flying hours will continue to increase. Already in 2022, they have climbed 42% compared to 2021. Rolls makes most of its money servicing jet engines, so this is another big plus.

Dylan Hood does not own shares in Rolls-Royce.

Watches of Switzerland

What it does: Watches of Switzerland is a British luxury retail group that specialises in selling Swiss watches and jewellery. It also offers insurance and repair services.

By John Choong. With inflation expected to continue heading upwards, I’m turning my attention to luxury goods. This is because luxury goods tend to have inelastic demand and are catered to a niche market that either benefits from high inflation or isn’t very much affected by it.

This was evident in Watches of Switzerland’s (LSE: WOSG) latest trading update which showed positive numbers. The FTSE 250 firm saw its revenue grow by 31% while many other retailers continue to suffer declines on a year-on-year basis. The outlook given by management was also generally positive as it expects to ends it financial year with 17% to 21% revenue growth, while expanding its offices, showing confidence that demand for its products are still hot.

While revenue growth slowed exponentially from its pandemic highs, I think a reasonable price-to-earnings (P/E) ratio of 19 and an average price target of £13.37 makes this stock a lucrative one for my portfolio. As such, I’ll be looking to add Watches of Switzerland to my portfolio in the near future.

John Choong has no position in Watches of Switzerland

S4 Capital

What it does: S4 Capital is a digital marketing agency network.

By Christopher Ruane. It has been a brutal few months for shareholders in S4 Capital (LSE: SFOR), with the growth shares trading for less than a fifth of where they stood a year ago.

Revenue growth remains strong and I think that even in an economic downturn, demand for digital marketing should stay high. The problem for S4 is its business model. Growing costs threaten to delay the path to profitability. Internal control systems have been found wanting, leading to delays in publishing results.

Many investors have abandoned the shares. But directors have been buying and I think the basic business model remains promising. There is work to be done in scaling quickly without letting costs balloon, as well as restoring investor confidence. I expect chairman Sir Martin Sorrell to address those concerns fast.

Meanwhile, I think the huge fall in the S4 Capital share price presents a buying opportunity for my portfolio.

Christopher Ruane owns shares in S4 Capital.

The London Stock Exchange Group

What it does: the company runs the London Stock Exchange. It also provides data and clearing services via its subsidiaries.

By Stephen Wright. In my view, The London Stock Exchange Group (LSE:LSEG) is one of the most interesting companies in the FTSE 100. I was very impressed with its most recent trading update and that’s why the stock is my top UK growth stock for September.

The company has three major segments – capital markets, data and analytics, and clearing services. Each of these reported solid results. As a result, profits this year are 21% higher than they were a year ago.

Until recently, I’ve found the London Stock Exchange Group difficult to value. Its recent acquisition of Refiniitv made its accounts a little complicated.

More recently, though, things have settled down. I think that the stock is trading at a price-to-earnings (P/E) ratio of around 20 and I think that it’s good value at those levels.

Stephen Wright does not own shares in The London Stock Exchange Group.

Harbour Energy

What it does: Harbour Energy is a UK-based oil production firm that operates across the North Sea, Asia, and Central America.

By Andrew Woods. In the past month, the shares in Harbour Energy (LSE:HBR) are up 25%. Recently, the company has been benefiting from higher oil prices, with Brent crude currently trading above $100 per barrel.

For the six months to 30 June, the business reported that pre-tax profits grew to $1.5bn, up from $120m for the same period in 2021. What’s more, its guidance range for full-year production increased from between 195,000 to 210,000 barrels, to between 200,000 to 210,000 barrels.

Furthermore, the firm stated that it was embarking on a $300m share buyback scheme, up $100m from previous announcements.

Financially, the company has a cash balance just under £600m, and total debt of £3bn. This debt would be something I’d like to see fall in coming months, because it appears to be quite large.

Overall, though, production is solid, and the broader economic situation seems to be favouring the company, hence it may have scope to grow.

Andrew Woods has no position in Harbour Energy.

Although these FTSE 100 giants are going through rough patches, I’m backing these firms to succeed In the long run. And I think both these firms could soar, or maybe even double in value in the long term. Here’s why.

Rolls-Royce

Rolls-Royce stock has fallen further in recent weeks amid concerns about an economic downturn around the world. However, I think there are some fairly positive core indicators for this British engineering firm that trades for 81p.

Civil aviation — the company’s largest business segment — is approaching pre-pandemic levels, particularly in Europe and North America. And this is positive as Rolls earns money through flying hours and not just the sale of its engines.

Meanwhile, the firm noted a strong order book in defence and record order intake in power systems. The defence business will likely continue its strong growth amid an increase in global sector spending.

Debt is the biggest issue facing this firm. The sale of ITP Aero should see the total balance decline by around 20%, but there is still a lot of debt that needs servicing. The business had net debt of £5.1bn as of June.

Share price forecasts vary considerably, with some suggesting it could fall to 60p if there is another major external shock, while others see it reaching as high as 147p.

I’m certainly on the bullish side. Rolls-Royce can be hugely profitable, and I can see the share price pushing upwards if guidance is met and when the dividend is restored. I already own Rolls-Royce shares but would buy more today.

GSK

GSK stock has plummeted in recent weeks after investor concerns were heightened by forthcoming lawsuits in the US. There are around 3,000 plaintiffs contending that the heartburn drug Zantac was responsible for the development of cancer. GSK says there is no scientific backing for the claims and the first legal case has been dismissed.

There are obviously concerns that the pharma giant may have to pay out billions to the plaintiffs. But, even if this is the case, I don’t see it being enough to cripple the firm. The thing is, we’ve known about the legal cases for years, but the share price only responded to it earlier in August.

Beyond this, prospects were looking up for GSK. It recently split with consumer goods arm Haleon, earning GSK some £7bn and allowing it to shift a sizeable proportion of its debt. The demerger created a new, leaner and richer GSK, poised to invest in developing its vaccine and drugs portfolio in an ever-growing market.

Right now, GSK currently has a price-to-earnings (P/E) ratio of 12. The industry average is around 26, so it’s clear the firm is trading at a considerable discount right now.

From a valuation perspective, I think there’s a clear argument that if GSK wins its legal cases, the share price could be far in excess of where it is now. Even if it doesn’t, I still think the stock looks cheap at the current 10-year low. I already own GSK stock but would buy more.

GSK is down 34% over the course of the last month, although some of that dip reflects a repricing of shares following the stock split.

A new opportunity

GSK recently split from its fast-moving consumer healthcare business, now known as Haleon. This had long been touted as a good move for both companies. The Haleon listing has earned GSK some £7bn and has allowed the pharma firm to shift some of its debt.

Haleon starts life with net debt of £10.3bn, or four times EBITDA. The split also allows GSK to focus on its core innovative vaccines and speciality medicines business.

The pharma giant has disappointed investors for some years, but the split gives GSK a chance to forge a new, more profitable future. For one, the new GSK and what is now Haleon were not necessarily well aligned. With less debt and more capital, it can fund drug development and acquisitions. As a number of drug patents are due to run out in the coming years, it will need to bring more products to market.

Could I really double my money?

GSK currently has a price-to-earnings (P/E) ratio of 12, which isn’t expensive for a company in the pharma or biotech space. By comparison, AstraZeneca trades with a P/E of 21, almost double the that of GSK. Meanwhile, the sector median is around 26. So it’s clear GSK is trading at a considerable discount right now.

I’m also fairly bullish on the pharma industry in general. Western populations are getting older and pharmaceuticals will play a major part in fighting disease associated with ageing. It should be able to capitalise on these trends, especially with new capital injections, acquisitions and renewed focuses.

Last year, management said that GSK expects to deliver sales growth and adjusted operating profit growth of more than 5% and more than 10% CAGR between 2021-2026.

So, with these two factors in mind, I genuinely could see the the share price extended to double where it is now.

But in addition to growth, investors will be hoping that GSK can throw out the near 3,000 personal injury lawsuits alleging that Zantac caused cancer. While one case has been thrown out, GSK will be tested on many more occasions.

The firm insists that the “scientific evidence supports the conclusion that there is no increased cancer risk associated with the use of ranitidine (the compound present in Zantac)”. The cases could cost GSK billions if it doesn’t manage to dismiss them all.

But I’ll continue to hold my shares and may buy more as I still expect the company to have a bright future.

GSK’s share price has tumbled as investors have priced in the potential costs of legal claims that heartburn medicine Zantac causes cancer.

However, this UK healthcare stock is now trading on just 11 times forecast earnings, with a dividend yield over 4%.

If management are correct to dismiss the Zantac cancer claims as “meritless”, I think GSK shares could be decent value at this level.

Could GSK shares go to zero?

GSK is facing around 3,000 individual personal injury claims in the US, plus a larger group action in Florida.

The company says that “the overwhelming weight of the scientific evidence” suggests that there is no increased cancer risk associated with Zantac. However, even if this is accepted in court, the legal process could be long and expensive.

It’s not possible to find a direct comparison to this situation. But I think it’s interesting to note that German chemicals group Bayer has so far allocated $16bn to settle long-running claims that Roundup weedkiller causes cancer.

In my view, it’s sensible to assume that GSK will face substantial costs relating to these claims. However, I don’t think there’s any doubt that the company will survive.

After all, GSK currently generates around £5bn a year of surplus cash.

I think the worst that’s likely to happen is that management might have to scale back growth investments and perhaps cut the dividend, in order to fund settlements.

What else do I need to know?

I’m not going to spend time trying to guess at the outcome of the Zantac trials. Instead, I’ve been taking a look at GSK’s recent trading. Is this healthcare business on track to deliver rising profits this year?

GSK has now split from its consumer healthcare division, Haleon (which might also face Zantac costs). This split means that GSK is now a pure-play pharma business with three divisions: vaccines, specialty medicines (eg, cancer treatments), and general medicines (eg, asthma inhalers).

Sales from these three divisions rose by 28% to £14,199m during the first half of this year. Adjusted operating profit rose by 33% to £3,951m during the same period.

CEO Emma Walmsley’s latest guidance for 2022 suggests that full-year sales should rise by around 6%-8%. Adjusted operating profit is expected to be 13%-15% higher.

When profits rise more quickly than sales like this, it tells me that profit margins are improving. That’s good news, too.

GSK share price: buy, sell, or hold?

I’ve learned from experience to be cautious about investing in companies with uncertain legal liabilities. In the US, especially, these can often end up higher than anyone expected.

However, GSK is a large, profitable business, and its debt levels should be lower following the Haleon split. I think the risks from the Zantac claims should be manageable.

For long-term investors, I think GSK could be a solid buy at current levels.

The pandemic triggered a surge in fresh funding from governments and investors alike. And with this capital being allocated across a broad spectrum of research projects, the quality and quantity of healthcare products are forecast to rise rapidly. As a result, analysts predict the market opportunity for healthcare stocks will grow annually by double-digits over the next decade.

This obviously presents a potentially lucrative opportunity for investors. So, let’s explore the risks and rewards of investing in healthcare shares a bit further. 

What are healthcare stocks?

Healthcare stocks lie at the heart of the medical industry. And as the name suggests, these businesses are focused on maximising the quality of patient care to let people live longer and healthier.

Typically, healthcare shares can be organised into one of four categories:

• Healthcare providers – These firms are on the front line, delivering healthcare to patients first-hand. Such businesses include hospitals, physician practises, nursing facilities, and more recently, telehealth providers.
• Drug developers – Companies engaged in researching and developing new treatments and medicines to tackle diseases, infections, mutations, and disorders.
• Medical device designers – Groups designing and manufacturing devices to improve the quality of patient care. This can range from something as simple as a stethoscope to as complex as surgical robots.
• Payers – While less common in the UK, this segment includes all the businesses involved in helping cover medical costs like health insurance providers and pharmacy benefit managers.

This is by far one of the largest and most complicated industries to operate in. Due to the high degree of importance and expertise needed when handling patients’ lives, regulations are extremely strict. And, in some cases, create prohibitively expensive barriers to entry.

For example, both drug developers and medical device designers need to receive regulatory approval in each country where they wish to offer their products. 

Industry challenges

Here in the UK, that regulatory body is the Medicines & Healthcare Regulatory Agency (MHRA). In the US, it’s the Food & Drug Administration (FDA). And since every regulator has different standards and requirements, the price of checking off all the boxes gets expensive very quickly.

An approval prerequisite for drug developers requires clinical trials that can take over a decade to complete. Medical device designers need to demonstrate the safety and efficiency of their products with field data that’s expensive to gather.

Healthcare providers have to undergo similar approval processes, and payers are subject to significant financial oversight.

To put it simply, life is not easy for healthcare stocks. But for those that can overcome these regulatory hurdles without going bankrupt, an enormous market opportunity lies ahead. According to a 2020 report by the World Health Organisation, $8.3trn is spent annually on healthcare. That’s 10% of global GDP! And it’s still rising.

Therefore, it’s not surprising that some of the best-performing shares over the years operate within the healthcare sector. With that in mind, let’s explore the top five healthcare providers on the London Stock Exchange in order of market capitalisation.

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Top healthcare shares in the UK

AstraZeneca

AstraZeneca is one of the largest pharmaceutical companies and healthcare stocks in the world. Given its access to vast resources, the group develops new treatments for a wide range of diseases. The list includes cancer, cardiovascular, renal respiratory diseases, and immunology and other rarer conditions. 

It already has a diverse portfolio of products on the market and, more recently, is known for its Covid vaccine. Looking at the current project pipeline, AstraZeneca has 183 drug candidates being researched, with 16 in late-stage development and two under regulatory review.

Key Metrics:

• Market cap: £157.2bn
• Average daily volume: 2.39m 
• HQ: Cambridge, UK
• Cash/debt: $6,398m/$30,781m

GlaxoSmithKline

GlaxoSmithKline is a global leader in vaccines and pharmaceutical treatments targeted at cancer, HIV, immuno-inflammatory, and respiratory diseases. The healthcare company has established research teams and manufacturing facilities worldwide, providing a global distribution network, particularly across the US, Europe and Asia.

With over 1,500 active partnerships with external pharmaceutical organisations and governments, GlaxoSmithKline stands out amongst the crowd of healthcare stocks. Until recently, It also had a consumer healthcare division that has since been spun off into its own company called Haleon. The group is now purely focused on developing new treatments.

Key Metrics:

• Market Cap: £67.45bn
• Average Daily Volume: 6.67m
• HQ: Brentford, UK
• Cash/Debt: £6,532m / £22,111m

Smith & Nephew

Founded in 1856, Smith & Nephew is one of the oldest medical device manufacturers in the world. The group operates in over 100 countries, supplying medical institutions with critical equipment and consumable accessories.

The healthcare stock is renowned for its expertise in wound management with its diverse portfolio of dressings, as well as products tackling other areas. The list includes orthopaedic reconstruction (knee, hip, and shoulder joint replacements), hospital imaging systems, trauma fixation products, and tools performing a variety of medical procedures.

Key Metrics:

• Market cap: £10.9bn
• Average daily volume: 2.64m
• HQ: London, UK
• Cash/ebt: $1,290m/$3,339m

Hikma Pharmaceuticals

Hikma Pharmaceuticals is a global drug developer with a massive portfolio of over 670 generic and in-licensed products on the market today. The group’s expertise in replicating off-patent medicines drastically reduces costs for patients while simultaneously improving accessibility.

Beyond the generics, Hikma also has its own drug development pipeline for new and bespoke treatments that target various therapeutic categories such as anti-infectives, cardiovascular, central nervous system, diabetes, cancer, respiratory, and pain management.

Key Metrics:

• Market cap: £3.83bn
• Average daily volume: 1.07m
• HQ: London, UK
• Cash/debt: $450m/$846m

Spire Healthcare

Spire Healthcare is the UK’s largest independent hospital stock serving the private healthcare sector. The company has 47 facilities scattered across the country, providing the standard range of services, including diagnostics, inpatient care, and outpatient care.

The group collaborates with almost 8,150 experienced consultants to handle a long list of medical circumstances such as orthopaedics, gynaecology, cardiology, neurology, oncology, and general surgery.

Key Metrics:

• Market cap: £826.5m
• Average daily volume: 865.41k
• HQ: London, UK
• Cash/debt: £203m/£1,265m

Investing in the US healthcare industry

American healthcare stocks are bound to the same degree of regulatory restrictions. However, US healthcare spending represents almost half ($3.8trn) of the entire market worldwide. So, it’s hardly surprising that there is a far longer list of healthcare shares across the pond for investors to choose from.

Some of the leading names in this sector on the New York Stock Exchange and Nasdaq, in order of market capitalisation, are:

1. Pfizer Inc (NYSE:PFE)
2. Intuitive Surgical (NASDAQ:ISRG)
3. Moderna (NASDAQ:MRNA)
4. Masimo (NASDAQ:MASI)
5. Teladoc (NYSE:TDOC)

Are healthcare stocks right for you?

While healthcare shares are often perceived as a relatively stable and safe place to invest, that’s often not the case. As I’ve already explained, the costs of operating in this sector are exceptionally high, especially for drug developers. 

Consequently, these firms are typically highly leveraged, with enormous credit facilities being used to fund research, development, trials, and eventually manufacturing. That creates quite a bit of risk. After all, if a product fails during development or regulators decide it isn’t safe, a lot of capital can go down the drain.

Needless to say, this can make investing in healthcare stocks a risky endeavour. Even more so when it comes to the smaller players with restricted access to precious external financing. 

That means healthcare shares probably aren’t suitable for everyone. But for those willing to take on the risk, there is a multi-trillion-dollar market opportunity available to profit from. And by taking a diversified approach, investors can potentially reap substantial returns through multiple channels.

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Disclosure

Zaven Boyrazian owns shares in Masimo, Intuitive Surgical, and Teladoc.

In fact, some scientists have described biotech as the future of medicine. And consequently, analyst forecasts predict the biotech sector alone will grow by an annualised rate of 15.8% until 2028, reaching $2.4trn! That’s more than three times bigger than the current $752m market size.

Needless to say, this presents a massive growth opportunity for those willing to invest in biotech stocks. But this growth doesn’t come without its risks. So, let’s explore exactly how these businesses work and the threats a biotech investor needs to know about.

What are biotech stocks?

Biotech stocks are a small but rapidly expanding segment of the healthcare industry. These businesses operate similarly to pharmaceutical companies. They both research new treatments and medicines for diseases, run clinical trials to prove efficacy and safety, and then eventually bring their product to market after regulatory approval.

However, the key differential in biotechnology is the approach to developing new treatments. Traditional pharmaceuticals use chemicals as the basis for new drugs, whereas biotech uses living organisms such as bacteria and enzymes. As crazy as that sounds, it’s opening many new avenues and solutions for treating genetic diseases and developing highly effective vaccines.

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The development pipeline for biotech stocks

The drug development pipeline for biotech stocks has five steps:

1. Discovery

Scientists identify a potential drug candidate for treating a specific disease. Typically, firms prioritise treatments with ample market opportunities and little competition on the market or in development.

2. Preclinical trials

Once a candidate is selected, non-human lab testing begins. This can be done using in vitro (in test tubes) and/or in vivo (in animals such as mice) testing. 

3. Clinical trials

If preclinical trials show encouraging results, human trials begin with qualifying patients recruited from hospitals and other medical institutions. This is the longest part of the process and where most drugs fail. 

• Phase 1 – Initial small-scale study where, on average, 60 closely-monitored patients receive different doses. The goal is to determine the highest effective dosage that does not cause severe side effects.
  
• Phase 2 – Assuming Phase 1 is successful, Phase 2 expands the study to around 120 patients. The goal is to uncover evidence of the drug candidate actually working while simultaneously isolating the optimal dose.
  
• Phase 3 – This is the longest part of the clinical trial process and can take years to complete. The goal is to prove the effectiveness of the treatment compared to existing drugs. Studies are expanded to include an average of 600 patients. However, patient numbers can venture into the thousands depending on the drug. Phase 3 trials are most commonly run as randomised, double-blind studies. Some patients receive an existing drug and/or a placebo, while other patients receive the new treatment being tested. 

4. Regulatory approval

If Phase 3 trials reveal strong evidence of high efficacy and safety, biotech stocks then file for approval from drug regulators such as the MHRA in the UK and FDA in the US. This process can take anywhere between 6 and 10 months and may require the company to perform further clinical trials if insufficient evidence is provided. If the regulator grants approval, the firm can offer its product on the open market and begin Phase 4 trials.

• Phase 4 – Drugs with regulatory approval still need to be monitored when offered to patients. The goal is to determine whether any long-term health impact occurs that would not have been detected during Phase 3 trials.

5. Commercialisation

After regulatory approval is granted, biotech groups still need to convince doctors and health insurance companies to offer the new drug to patients. This is where sales representatives come into the picture. And dethroning an existing treatment even if it’s not as effective can be a challenge.

This product pipeline can span decades. And statistically speaking, over 90% of drug candidates never make it to market. That’s why most biotech shares develop multiple drugs at the same time. Like prudent investors, these companies are diversifying their investments.

But running multiple trials at the same time is a highly capital-intensive process. Consequently, most young biotech businesses have to continuously issue new shares to raise the necessary funds. This causes significant equity dilution. It’s also common to see larger players acquiring younger companies when a drug candidate shows a lot of promise.

Top biotech shares in the UK

Here are the top biotech stocks on the London Stock Exchange in order of market capitalisation:

AstraZeneca

AstraZeneca is one of the largest pharmaceutical companies and healthcare stocks in the world. Given its access to vast resources, the group develops new treatments for a wide range of diseases. The list includes cancer, cardiovascular, renal, respiratory, immunology and other rarer conditions. 

The company already has a diverse portfolio of products on the market and its vaccine against Covid-19 made it a household name. Looking at the current project pipeline, AstraZeneca is researching 183 drug candidates, with 16 in late-stage development and two under regulatory review.

Key Metrics:

• Market Cap: £156.3bn
• Average Daily Volume: 2.33m
• HQ: Cambridge, UK
• Cash/Debt: $6,398m/$30,781m
  

GlaxoSmithKline

GlaxoSmithKline is a global leader in vaccines and pharmaceutical treatments targeting cancer, HIV, immuno-inflammatory, and respiratory diseases. The company has established research teams and manufacturing facilities worldwide, providing a global distribution network, particularly across the US, Europe, and Asia.

With over 1,500 active partnerships with external pharmaceutical organisations and governments, GlaxoSmithKline stands out among the crowd of healthcare stocks. It’s worth noting that the group also has a consumer healthcare division for over-the-counter products. However, Glaxo is in the process of spinning this off into a standalone entity, enabling the group to become entirely focused on developing new treatments. 

Key Metrics:

• Market cap: £88.5bn
• Average daily volume: 9.02m
• HQ: Brentford, UK
• Cash/debt: £4,335m/£24,173m
  

PureTech Health

PureTech Health is a mid-stage biotech business with a focus on creating new therapies for diseases with limited or no existing treatment options. The firm specialises in medicines related to the brain, gut, and immune system. It has two drugs with US and European regulatory approval, along with a further 16 in clinical trials and 27 candidates being investigated.

Beyond researching and developing its own treatments, management has built up a significant equity interest in other biotech groups. In total, it has a stake in eight different companies, three of which have commercial products and a further three in the final round of clinical trials.

Key Metrics:

• Market cap: £492.9m
• Average daily volume: 267.4k
• HQ: Boston, US
• Cash/debt: £468m/£52m
  

Oxford BioMedica

Oxford Biomedica is a rising gene and cell therapy business specialising in viral vectors. In oversimplified terms, the company re-engineers existing viruses to deliver improved genetic material into patients’ cells.

Management is using this technology to develop its own treatments. However, management also outsources its capabilities to other drug developers via its LentiVector platform. 

This drastically reduces the cost of developing gene and cell therapies. So, it’s not surprising that pharmaceutical titans like Bristol Myers Squibb, AstraZeneca, and Novartis are all active customers. These customers pay ongoing milestone fees throughout development, as well as a royalty on sales for any drug that makes it to market. However, it’s worth noting that most of the current drug pipeline using LentiVector remains relatively early stage.

Key Metrics:

• Market cap: £466.9m
• Average daily volume: 223.76k
• HQ: Oxford, UK
• Cash/debt: £109m/£9.34m
  

Avacta Group

Avacta is an early-stage biotech firm specialising in the fields of diagnostics and therapeutics. Its diagnostics division created a proprietary platform called Affimer. This is a portfolio of reagent proteins that can be used to detect specific infections within a given sample. Traditionally, this process uses antibodies. However, manufacturing antibodies is a complex, time-consuming process that Affimer reagents don’t have to go through. 

On the therapeutics side of the business, the company is currently testing its flagship AVA6000 chemotherapy drug in clinical trials. This treatment is being developed with the group’s second chemical platform called pre|CISION. Unlike existing chemotherapy treatments, AVA6000 is highly targeted. As a result, fewer healthy cells are caught in the crossfire, which reduces the severity of side effects.

Key Metrics:

• Market cap: £311.4m
• Average daily volume: 1.46m 
• HQ: Wetherby, UK
• Cash/debt: £26m/£1.7m

Investing in the US biotech industry

As with pharmaceutical and healthcare companies, investing in American biotech stocks comes with the same degree of regulatory risk. All treatments need to approval from the Food & Drugs Administration (FDA) for commercialisation in the US.

The list of US biotech stocks is significantly longer than here in the UK, as the American healthcare market size is enormous by comparison. With that said, here are some of the largest biotech shares available across the pond in order of market capitalisation.

1. Regeneron Pharmaceuticals (NASDAQ:REGN)
2. Vertex Pharmaceuticals (NASDAQ:VRTX)
3. Exelixis Inc (NASDAQ:EXEL)
4. Novavax Inc (NASDAQ:NVAX)
5. Twist Bioscience Corp (NASDAQ:TWST)

Are biotech stocks right for you?

Investing in a biotech company is a high-risk move. Drug development is notoriously challenging and expensive, with most drug candidates failing to get past regulators. In fact, a failure in a clinical trial can often be a death sentence. After all, most pre-commercialisation biotech stocks rely on external financing, which isn’t easy to raise when promoting a failing product.

But, this sector has a lot to offer investors despite its high-risk nature. And an easy solution to reducing risk exposure is to only invest in the firms that already have a product on the market with a sizeable revenue stream that can help fund future developments. 

Having said that, even the largest biotech shares can still be volatile, especially when bad results emerge from ongoing clinical trials. Therefore, the biotech sector is not suitable for everyone. And taking a diversified approach is, as always, a prudent strategy when investing in biotech stocks.

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