Neil Woodford’s Equity Income Fund is heavily weighted towards healthcare companies, and GlaxoSmithKline (LSE: GSK) makes up 6.3% of this entire fund. Woodford hasn’t only been buying the company for its 5%-plus dividend though, but also sees great value in the company being broken up. This is a common refrain among fund managers as GSK CEO Sir Andrew Witty has bucked the recent consensus amongst pharma giants and charted a path towards more reliance on consumer healthcare goods such as toothpaste and over-the-counter flu treatments.

These consumer-facing goods now bring in nearly 30% of GSK’s revenue, but their 17% operating margins significantly lag the 32% brought in by pharmaceuticals or 29% from vaccines. While 17% margins are nothing to sneer at, they do bring down group performance, which is especially galling for some investors as GSK’s new HIV drugs finally enter the market and bring in significant revenue. However, Witty’s turnaround is beginning to bear fruit as earnings are expected to increase at a low-double-digits clip this year and will once again cover solid dividends.

Changing business model

AstraZeneca (LSE: AZN) is another major holding in Woodford’s income fund thanks to the company’s 4.7% yielding dividend. AstraZeneca, like many of its American counterparts, has doubled down on high-risk-but-high-profit speciality drugs. CEO Pascal Soriot sees the company’s future in designing targeted cancer treatments for a smaller subset of the population. This requires a smaller sales force than the company currently boasts, which will bring down operating costs but also require higher R&D spending.

This shift in business model comes as the company lost its US patents to Nexium in 2014 and will lose Crestor patents this year, which management is expecting to bring earnings down in the mid-single-digits. These two drugs combined brought in roughly a third of revenue in prior years, so generic competition will impact the bottom line for several years to come. Despite this, the growth areas now bring in 56% of revenue and the company has a well-stocked pipeline after spending over $6.2bn on acquisitions in the past two years alone. Looking forward, the company’s long-term focus on high margin oncology treatments makes good sense and the company has an enviable pipeline of new drugs to tide it over in the short term as earnings fall due to generic competition.

A risk too far

With no revenue whatsoever, small cap 4D Pharma (LSE: DDDD) is a far cry from GSK or AstraZeneca, yet Woodford owns nearly 24% of the company’s outstanding shares. 4D is a major bet on the viability of using beneficial bacteria to treat diseases ranging from asthma to multiple sclerosis. So far, the company has acquired a bevy of small drugs developers and now has 15 drugs in development with two currently in patient trials and three more expected to begin them this year.

After two share placements, the company had £85.4m in cash at year-end, which should fund operations and acquisitions for several years to come. 4D is one to watch then, but the risks of investing in a company with no revenue that relies on issuing shares to fund development is too risky a prospect for me until results from more clinical trials are released.

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