Should You Invest In Shire PLC Instead Of GlaxoSmithKline plc And AstraZeneca plc?

AstraZenecaNothing gets a share price moving upwards like a bid. Indeed, investors in Shire (LSE: SHP) and AstraZeneca (LSE: AZN) (NYSE: AZN.US) have felt the benefit of the companies they own being the subject of several (albeit failed) bids in 2014. As a result, shares in the two companies have risen by 60% and 24% respectively in 2014.

Meanwhile, stable mate GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) continues to deal with negative publicity surrounding its Chinese operations, thereby holding its share price back throughout 2014 so that it is now down 1% for the year. Does this mean that it now offers the best value, or is Shire now the most attractive of the three pharmaceutical stocks?


Drug pipelines are something of a ‘make or break’ asset for pharmaceutical companies. Indeed, all it takes is a couple of new breakthrough drugs to glide through clinical trials and, suddenly, the company’s top line has increased by a vast amount. Similarly, even a fantastic pipeline can yield no blockbusters and a great deal of disappointment. So, valuing a company based on a pipeline is tough and highly unpredictable.

However, the management of Shire is banking on its current pipeline to deliver a doubling of sales by 2020. Indeed, following the three bids from Abbvie, Shire’s management laid out its pipeline in an unusually high level of detail to show how it feels it can achieve its target. Whether it achieves it or not, the company clearly has excellent potential and a relatively high degree of diversity in its pipeline, which is about as much as any pharmaceutical company can realistically offer its investors.

Meanwhile, AstraZeneca continues to bolster its pipeline through multiple acquisitions. However, it remains a turnaround story (with key blockbuster drugs set to go off-patent imminently), while GlaxoSmithKline continues to offer a robust and diversified pipeline. Unfortunately for GlaxoSmithKline, its operations in China are grabbing all the headlines at present.


Clearly, bid approaches cause valuations to hit higher highs. That’s been the case for Shire and AstraZeneca, which now trade on price to earnings (P/E) ratios of 23.9 and 17.6 respectively. GlaxoSmithKline, on the other hand, has a P/E of 15.3, which is relatively attractive. Similarly, GlaxoSmithKline’s yield of 5.1% easily beats its two rivals’ yields of 0.4% (Shire) and 3.8% (AstraZeneca).

Looking Ahead

So, while all three companies offer great long term potential through impressive (and in AstraZeneca’s case, vastly improving) drug pipelines, Shire could see its share price move higher in the short term if there is more bid activity. Although more expensive than both of its larger peers, the target of a doubling of revenue within six years, if achieved, could mean that a P/E of 23.9 is justified. For income seekers and value investors, though, AstraZeneca and, particularly, GlaxoSmithKline could prove to better investments.

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Peter owns shares in AstraZeneca and GlaxoSmithKline. The Motley Fool has recommended shares in GlaxoSmithKline and Shire.