The Good, the Bad and the Ugly of pharma stocks

Bilaal Mohamed reveals his best and worst picks from the pharmaceuticals sector.

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Pharmaceuticals are popular picks for investors but the quality of the investments on offer varies widely.

The Good…

The UK’s largest pharmaceuticals company GlaxoSmithKline (LSE: GSK) saw its shares climb to three-year highs following the EU referendum as investors fled to defensive stocks and overseas earners. Fortunately the FTSE 100 drugs giant fell into both camps and benefitted handsomely as a result. On the flipside, an inflated share price can sometimes have a detrimental effect on the dividend yield for would-be investors, but with the strong prospect of another hike to the shareholder payout this year, Glaxo can still offer a prospective yield of around 5%.

The Brentford-based firm updated the market with an encouraging set of third quarter results last week as it reported higher sales and profits for the period, helped of course by the weaker pound. Pre-tax profits rose to £1.27bn from £867m for the three months to the end of September, on higher revenues of £7.54bn compared to £ £6.13bn for the same period in 2015. Glaxo remains a core holding for many UK portfolios and continues to offer strong attractions for its defensive quality, growing dividends and its overseas earnings.

The Bad…?

Glaxo’s London-listed rival and fellow pharmaceuticals giant AstraZeneca (LSE: AZN) has also benefitted from the UK’s decision to leave the comfort of the European Union, with its share price peaking at record highs above £52 in August. But personally I think the shares’ outperformance masks the drugmaker’s gloomy outlook, as it’s no secret that the Anglo-Swedish firm has struggled with falling revenues and shrinking profits as a result of patent expiries and generic competition on some of its most important drugs.

In its most recent trading update, Astra reported a disappointing set of results for the first half of its financial year. Operating profits were down 28% to $1.3bn, with revenues slipping to $11.7bn as a result of declining product sales, in particular its cholesterol-busting drug Crestor in the US. Unfortunately, the outlook still isn’t great with City analysts anticipating further earnings declines over the next couple of years. Although the dividend remains strong for existing shareholders at 4%, new investors might find Glaxo’s healthier outlook more appealing.

…and the Ugly

Speciality pharmaceuticals business Indivior (LSE: INDV) hasn’t been trading on the London Stock Exchange for very long but has already found itself in a bit of a hot water with the US authorities. In July the Slough-based firm revealed that the Federal Trade Commission was seeking court action over the company’s addiction-control drug Suboxone. It had investigated whether Indivior and its predecessor, Reckitt Benckiser US, had filed a citizen petition with the Food and Drug Administration and negotiated with competing manufacturers to maintain its monopoly.

As if that wasn’t enough to worry about, the Slough-based FTSE 250 firm announced more recently that it was now facing a lawsuit from 35 US states and the District of Columbia alleging violations of state and federal antitrust and consumer protection laws. Indivior has since rebuffed the allegations but nevertheless things could turn ugly. The outlook remains uncertain and I would stay away for now.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Bilaal Mohamed 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.

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