Today I am looking at the key considerations when investing in GlaxoSmithKline (LSE: GSK) and AstraZeneca (LSE: AZN).

Patent losses

There is no doubt that the enduring problem of exclusivity losses on key labels is likely to remain a strain on both AstraZeneca’s and GlaxoSmithKline’s top lines this year and beyond.

To illustrate the scale of these pressures, this month GlaxoSmithKline was found to have paid £50m to companies manufacturing generic rivals to its Seroxat depression-battler between 2001 and 2004. The medicines giant was fined £37.6m this month by the CMA as a result, although GlaxoSmithKline denies the claims.

An unpredictable industry

In order to get revenues growth chugging again, both AstraZeneca and GlaxoSmithKline have thrown vast sums at their R&D departments to offset these competitive pressures on their established labels.

GlaxoSmithKline spent £3.1bn in its laboratories in 2015 to deliver the next generation of sales drivers, while AstraZeneca hiked R&D investment in its core products by 13% last year, to $5.6bn (£4bn).

But of course the business of drugs development is fraught with hurdles, where product delays and even abandonments can result in billions of pounds worth of additional development costs and lost revenues. These are scenarios that do not bear thinking about as both GlaxoSmithKline and AstraZeneca desperately battle against the aforementioned patent problem.


Still, I believe investors should take heart from both companies’ excellent track record of getting product from the lab bench and onto the shelf.

Just this month AstraZeneca received approval in the EU for its Zurampic gout treatment and Brilique cardiovascular drug, for example. And GlaxoSmithKline’s ViiV Healthcare subsidiary released positive Phase II data for its first two drug, long-acting injectable regimen for the treatment of HIV. The firm plans to commence Phase III testing later this year.

And both drugs giants remain hot on the acquisitions trail to bolster their expertise in hot growth areas, further boosting the potential of their respective pipelines. GlaxoSmithKline completed the purchase of Bristol-Myers Squibbs’ HIV-related assets this week, while AstraZeneca completed the acquisition of a majority stake in biotech play Acerta Pharma earlier this month.

Stunning dividends

And thanks to their improving earnings outlooks, both GlaxoSmithKline and AstraZeneca look set to continue offering market-mashing dividend yields.

GlaxoSmithKline has vowed to pay a dividend of 80p per share through to the close of 2017, with a consequent 5.8% yield smashing the FTSE 100 average around 3.5% to smithereens. And the City’s projections of a 280 US cent per share reward at AstraZeneca for this year and next yields a healthy 4.7%.

Sure, a combination of colossal R&D costs — combined with the prospect of further near-term earnings pain — will serve as a disappointment for those seeking chunky dividend growth. But as their product pipelines steadily deliver the goods, and surging global healthcare investment snaps up their wares, I expect dividends at both AstraZeneca and GlaxoSmithKline to stomp higher again in the years ahead.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended AstraZeneca and GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.