With a market capitalisation of £80bn, GlaxoSmithKline (LSE: GSK)(NYSE: GSK.US) is the sixth largest company in the FTSE 100.
GlaxoSmithKline operates in a highly regulated market. Many of its top products are protected by patents that prevent competition moving in and stealing sales. This gives the company an enormous stream of high-margin cashflows.
Despite everything that GlaxoSmithKline has going for it, only modest earnings per share growth of 7.7% is forecast from the business in 2014. The current 2014 P/E of 13.3 could begin to look over-generous if growth expectations decline.
As economic growth in emerging markets lifts millions into the middle class, a whole new market opens up for GlaxoSmithKline. If Glaxo can get back on track in China, the company could have another decade of earnings growth ahead of it.
Back in July of this year, Glaxo shocked the markets when it admitted that some of its staff may have bribed Chinese doctors. Last month, Glaxo reported that the disruption to its business in China led to a 61% sales decline in the world’s most populated country.
AstraZeneca (LSE: AZN)(NYSE: AZN.US) is smaller than Glaxo, with a market capitalisation of ‘just’ £41bn.
Like any successful pharmaceutical, the business underlying AstraZeneca is high margin with a high level of repeat purchase. One of the biggest attractions of the shares is the current large dividend yield, which is forecast to come in at 5.3% for this year.
Market fears over AstraZeneca’s so-called ‘patent cliff’ have held back the shares in recent years. If AstraZeneca does not bring more patented drugs into its portfolio, earnings could decline fast.
AstraZeneca is aware of the risk to earnings and has been busy making acquisitions. The recent purchase of Pearl Therapeutics brings a portfolio of respiratory drugs into the AstraZeneca stable. Shareholders will hope that the company can continue to identify suitable bolt-ons and use its financial firepower to get the company growing again.
The biggest risk to the shares is that the company’s current strategy fails to deliver growth. This would see the shares re-rated significantly. Though not expensive today, it is not difficult to imagine a scenario where AstraZeneca shares end up 30% lower.
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> David does not own shares in any of the companies mentioned. The Motley Fool has recommended shares in GlaxoSmithKline.