Businesses that don’t invest for the future struggle to survive over the long term. And the companies that spend the most on research and development often have the best growth prospects. These companies are able to attract the best talent and investment capital, two traits that will only boost growth prospects.
In the pharma industry, the research and development of new treatments is essential to growth and AstraZeneca (LSE: AZN) is leading the field in terms of research funding.
Indeed, during 2014, Astra’s R&D spending as a percentage of sales jumped by a double-digit percentage. The company’s peers, industry behemoths J&J, Roche, Bayer, Sanofi, Lilly and Pfizer all increased R&D spending by 3% to 5%, in line with sales growth.
GlaxoSmithKline’s (LSE: GSK) R&D spending as a percentage of sales actually fell by a double-digit percentage as the company struggled to cut costs in an attempt to boost margins.
Starting to yield results
Astra’s devotion to R&D spending is really starting to show up in the company’s treatment pipeline and number of drug launches. For example, the company amazed the market last year when it broke records for the number of treatment approved for sale by regulators in the space of twelve months.
However, Astra’s sales are set to continue falling this year as the company grapples with the sliding sales of its blockbuster Crestor drug. But this is expected to be the company’s last year of sales declines.
New treatments are expected to re-ignite sales growth from 2016 onwards and Astra’s management believe that the company can rack up annual sales of $45bn by 2023 — almost double the level reported for 2014.
Glaxo isn’t following the same path. In fact, Glaxo is transitioning into a consumer goods company as the group focuses on consumer healthcare assets and vaccines.
Granted, these aren’t the most exciting sectors to be involved in, but they are extremely important to the company, and they’re essential to everyday life.
Overall, Glaxo is taking a relatively safe route while Astra chases growth with hefty spending on R&D to try and enhance its treatment pipeline.
Unfortunately, Astra’s bright prospects mean that investors are willing to pay a premium to get their hands on the company’s shares. Astra currently trades at a forward P/E of 16.6, which may seem expensive to some but it’s a premium worth paying for the company’s long-term growth prospects.
Difficult to choose
It’s almost impossible to choose between Astra and Glaxo. The two pharma giants each have their own strengths and weaknesses.
As Astra chases growth, Glaxo is becoming more defensive and the company’s dividend yield, which currently stands at 5%, is hard to pass up.
