A couple of years ago, AstraZeneca (LSE: AZN) (NYSE: AZN.US) was the whipping boy of the pharmaceutical world. Its drugs pipeline was drying up, patents were expiring and sales were plunging. The share price had gone nowhere for ages. Brokers were giving it a beating, with a spate of downgrades. Even currency movements were against it. Astra was under the cosh.
GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US), by contrast, was the much-admired head boy of FTSE pharmo. It had won applause for its strategy of cutting costs and offloading non-core holdings. Its drugs pipeline looked healthy and chief executive Sir Andrew Witty’s strategy of shifting from “white pills and western markets” towards consumer healthcare and emerging markets had been awarded top marks.
Tables Turned
Then look what happened. Glaxo’s share price grew a disappointing 12% over the past two years, trailing the FTSE 100’s return of nearly 18%. AstraZeneca, however, returned a startling 44%. No longer the whipping boy, AZN now holds the whip hand. So what went right (or wrong)?
Golden boy Glaxo’s reputation has been tarnished by bribery scandals, in China, Iraq and Poland, with more apparently set to follow Jordan and Lebanon. For those who think these allegations don’t matter, pharmaceuticals and vaccines sales in China have since fallen 29%.
Glaxo has also faced a string of patented expiries and late-stage failures, notably megablockbuster heart drug Darapaldib and cancer vaccine MAGE-A3. Maybe the signs were on the wall in February, when Warren Buffett sold off his remaining $17 million stake.
Big Pharmo, Big Deals
AstraZeneca has been shining by comparison. Its drugs pipeline is growing, with 104 ongoing projects, of which 90 are in the clinical phase of development. Revenues rose 3% to $6.4 billion in the first quarter. Its five designated growth areas (emerging markets, Japan, Brilinta and its diabetes and respiratory franchises) delivered an extra $1.2 billion of revenue in 2013.
All of which is very nice, but it’s takeover talk that has really got investor juices flowing. Astra’s shares soared 7% in a day on rumours that it is a target for US giant Pfizer.
This added to the excitement gripping the sector, following the multi-billion dollar three-way link-up between Glaxo, Swiss drugmaker Novartis and US medicines group Eli Lilly, who plan to build a world-leading consumer healthcare business. Investors love a deal, and Glaxo also leapt 6% in a day. Big pharmo deal making is back, with a vengeance, it seems.
AstraZeneca may have turned the tables on Glaxo, but it may struggle to hold its advantage for investors, especially if recent takeover speculation comes to nought. Glaxo’s three-part deal could really drive future shareholder value, especially if it allows the company to dispose of some of its established businesses. Astra may have thrashed its rival lately, but I reckon Glaxo is cracking the whip today.
