It used to be that investors in big pharma had a straight choice between GlaxoSmithKline (LSE: GSK) (NYSE:GSK.US) and AstraZeneca (LSE:AZN) (NYSE: AZN.US). They remain the two largest firms in the pharmaceutical sector of the London Stock Exchange, so that thinking still lingers in most investors’ minds.
But GSK’s CEO Andrew Witty has taken his company in a very different direction from Pascal Soriot at Astra. The two companies are no longer comparable, and it distorts the investment case to think of them that way.
The Unilever of healthcare
Mr Witty has de-emphasised the traditional big pharma strategy, whereby massive up-front investment in R&D aims to discover the next blockbuster drug to fund years of fat profits — most notably through the recent asset-swap with Novartis. He argues that Western governments will eventually baulk at the cost of healthcare for an ageing population, so the next generation of drugs won’t be so profitable. Perhaps the recent patent cliff scare also underlined the risky nature of prescription medicine.
So Mr Witty is emphasising global distribution of branded over-the-counter products and lower-margin vaccines, both of which play into growth in emerging market demand. Global consumer brands, low margins, emerging market growth, that sounds like the Unilever (LSE: ULVR) of healthcare. The two companies’ products even meet tangentially: there are markets where Unilever’s Signal toothpaste is up against GSK’s Aquafresh. The transition of GSK’s Horlicks from a Victorian tonic to India’s leading health drink mirrors the trajectory of Unilever’s Lifebuoy soap.
Biotech with a dividend
When Pascal Soriot took the helm in 2012 he committed AstraZeneca to just the science-heavy, R&D-led drug development that Andrew Witty is turning away from. Facing a steep and treacherous patent cliff, at the time I described Astra as like a biotech company with a dividend attached.
It still is, but three things have played to Mr Soriot’s advantage. To his credit, Astra’s scientists are delivering. Right now it’s creating a stir with immunotherapy, especially as a cancer cure. Secondly, biotech has become a fashionable sector. The thinking is that if you invent the drug, someone will pay for it. Thirdly, Pfizer’s aborted bid boosted Astra’s share price, which has remained elevated on the back of Mr Soriot’s bold confidence in Astra’s standalone earnings potential.
And the winner is…
Which of Mr Witty and Mr Soriot will eventually be proved right? The lesson for investors is that we won’t know until it’s too late. Investors shouldn’t stake too much on guessing what the future holds. Rather they should pick stocks — and plan portfolios — to suit their circumstances.
Personally I like boring but safe GSK. Stocks like GSK and Unilever, which offer bond-like security in their payout whilst locking in emerging market growth, make good cornerstone shares.
I’m wary of Astra’s valuation. Buoyed by lingering bid hopes, Mr Soriot’s big promises, and a biotech sector that could be in a bubble, I perceive bigger downside risk in the share price — but that’s countered by a bigger potential upside.
Both Astra and GSK offer good dividend yields, if little in the way of near-term dividend growth. That underlines their attraction to many investors, whether you want the income or want to re-invest and enjoy the compound growth in your holding.