Visit the science laboratory of any pharmaceutical company, or the labs of one of the world’s leading universities, and you’ll be amazed by the quality and diversity of the research being undertaken there.
Scientists will be trying to determine how proteins fold and how they interact with cell membranes. Geneticists will be unravelling the secrets of our DNA, and will be developing stem cell therapies that will transform the world of medicine. And researchers will be designing antibodies to combat diseases such as cancer and arthritis.
The pharmaceutical industry has faced plenty of naysayers who’ve argued that it’s in decline, that earnings will fall and that investors should avoid this industry. But just as those who said that television would decline with the rise of the internet were proved wrong, so I think the pharma sector will prove its critics wrong.
And in this article I’ll present two visions of the future of the drugs industry: GlaxoSmithKline (LSE: GSK) and Shire (LSE: SHP).
GlaxoSmithKline
There’s been much talk in recent years of GlaxoSmithKline’s drugs pipeline. There have been several medicine launches in recent years, yet none has turned into a blockbuster to match the success of treatments like Zantac. Yet I see this company’s strength not as its drugs pipeline, but instead the breadth of products that it offers, and the range of regions it serves.
GSK produces a wide variety of prescription medicines, some under patent, and many now off patent. Alongside this, it has a very substantial consumer healthcare range, including brands such as Voltaren, Sensodyne, Panadol and Nicorette.
What’s more, the firm has a growing vaccines business, and is the global leader in HIV/AIDS treatments.
And it’s taking this wide portfolio of products to clinics, pharmacies and supermarkets around the world. I expect this multi-pronged strategy to drive earnings gradually higher. A 2016 P/E ratio of 15.81 and a dividend yield of 5.77% means this company is very reasonably priced, and a recently sliding valuation means it may be a good time to buy.
Shire
Shire is a unique drugs business in that it uses highly focused research and in-depth knowledge of a range of rare diseases to produce effective treatments. It’s really a cluster of small biotech companies. In the past, such niche treatments would be so expensive as to be unaffordable, or wouldn’t merit the research and development spend required.
But by combining these biotech start-ups and pooling resources, a much larger company can be formed that has larger marketing and research budgets.
It’s a very clever way to run a drugs firm, and it has been working in spades. Earnings per share are expected to jump from 148.76p in 2013 to 350.91p in 2017, yet a pull-back in the stock price means that the 2016 P/E ratio is just 13.92, with a dividend yield of 0.38%.
If GSK is a dividend play, Shire is a growth company that may eventually mature into a high yielder. I feel both are worth a closer look.
