When it comes to picking the best FTSE 100 pharmaceuticals company, for me it’s a straight knockout fight between GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) and AstraZeneca (LSE: AZN) (NYSE: AZN.US).
I mean no disrespect to Shire, but its market capitalisation of a relatively low £17.1bn compared to £48.8bn for AstraZeneca and £75.5bn for GlaxoSmithKline means it really doesn’t have the clout to be a top-of-the-sector candidate.
But between the two big players, it really is a tough decision.
Is Glaxo really the best?
I’ve had Glaxo in the Fool’s Beginners’ Portfolio for some time, and I made my choice based on the firm’s better response to the so-called patent cliff that was looming — the expiry of patents on some major drugs coupled with competition from generic alternatives has been threatening profits for some time.
At the time, Glaxo’s drugs pipeline was looking stronger to me. But more importantly, the company was clearly recognising the potential of newer developments in biotechnology — things like gene therapy, for example, might seriously impact on the traditional blockbuster drugs model.
And on that score, Glaxo was using its financial muscle to make some interesting acquisitions.
New broom
But since then, from the opposition camp we’ve seen the driving force that is Pascal Soriot. Taking the helm of AstraZenenca in October 2012, Mr Soriot quickly set out a roadmap back to growing profits — and it’s a different approach to Glaxo’s. The new focus is back on core strengths, putting the research cash into beefing up the company’s pipeline of drug candidates, and getting rid of peripheral business that were too far from that core.
And it’s working — AstraZenenca’s earnings falls are slowing, and we’re set for a return to growth a fair bit sooner than City analysts were expecting. And it looks like dividends are set to be maintained too, where some were fearing there might need to be cuts.
But despite my respect for Mr Soriot (and I rate him as one of the FTSE 100’s top CEOs), GlaxoSmithKline still edges it for me.
Broader horizon
On short-term valuation measures, Glaxo looks better — there’s a slightly lower forward P/E (14 vs 15), a slightly higher dividend yield (5.2% vs 4.3%), and Glaxo has earnings growth forecast for 2015.
But more importantly, I prefer Glaxo’s wider view of the longer-term future, and over the coming decades I can see its openness to, and keenness to acquire, new technologies paying off.
