2016 has long been targeted by GlaxoSmithKline (LSE:GSK) management as the year when the company’s revenue and profits would finally begin to rebound from several years of stagnation. The latest results for 2015 suggest that this target may be within reach for the diversified pharmaceutical giant, so are share prices about to soar?
Revenue declines over the past years have been largely attributable to the 30% decline in sales since 2013 of blockbuster respiratory treatments whose US and European patents expired. The reliance on lumpy revenue from hit-or-miss drugs is why GSK has greatly expanded sales of reliably purchased consumer health goods and vaccines. These two segments now bring in 42% of sales, lessening reliance on developing a blockbuster drug.
However, the company still has an enviable R&D budget and concomitant drugs pipeline. A series of new HIV treatments have been rolled out and in 2015 brought in 29% of group operating profits. Analysts expect these treatments to continue growing for the foreseeable future and are a large factor in why analysts are expecting management to hit their goal of double-digit earnings growth for 2016.
Earnings per share are expected to grow by around 12% this year, excluding one-off income from asset swaps in 2015. This will help grow dividend cover, which has slipped considerably in recent years. Dividends currently yield 6%, and with shares trading at a not-exactly-cheap 16 times forward earnings, these will likely be the main driver of investor returns going forward. GSK may be a great option for income investors seeking relatively safe yields, but growth investors will find there are better pharma options out there.
Short-term pain, long-term gain
AstraZeneca (LSE:AZN) understands well GSK’s pain at losing patent protection on blockbuster drugs. The loss of US patents on heartburn drug Nexium in 2015 and cholesterol treatment Crestor this year will leave roughly 33% of revenue open to competition from cheaper generics.
However, unlike GSK, AstraZeneca isn’t diversifying into other revenue channels, but is doubling down on the traditional pursuit of major drugs development. The company spent $10bn on acquisitions last year in order to supplement its depleted pipeline with an eye towards increasing revenue from the current $24bn to $45bn by 2023.
Achieving this long-term goal may or may not be viable, but one near certainty is that the next two to three years will be rough for the company. Management itself is expecting earnings per share to decrease in the mid-single-digits this year thanks to the loss of Nexium and analysts aren’t expecting earnings to stabilise until 2018.
The good news for investors is that earnings safely cover the 4.8% yielding dividend and valuations are coming down. Shares are trading at 14.5 times forward earnings, largely in line with the FTSE 100. With a well covered dividend and good growth prospects, AstraZeneca could be a smart long-term play for investors seeking exposure to the pharmaceutical industry.
