It’s been a disappointing year thus far for investors in GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US), with shares in the pharmaceutical company being down 6%. This does not compare favourably to the wider market (the FTSE 100 is up 1%), nor to sector peer, AstraZeneca (LSE: AZN) (NYSE: AZN.US), which is up 23% having benefited from bid approaches from Pfizer.
A Challenging Quarter
Indeed, GlaxoSmithKline’s results released today showed that the company is struggling to come to terms with declining dales for its blockbuster inhaler, Advair. The removal of Advair from the reimbursement list of the US’s biggest prescription manager, Express Scripts, compounded falling sales for its omega 3 medicine, Lovaza, which is experiencing high levels of generic competition. The overall effect of this, as well as ongoing issues with regards to alleged bribery in China, has been a 4% reduction in revenue and a 12% fall in profit (after currency effects are removed).
A Different Story at AstraZeneca?
Meanwhile, sector peer AstraZeneca is also experiencing difficulties at present. Its patent cliff is in full-swing, with earnings for the full year expected to be 15% lower than last year, followed by a further 3% fall next year. This is in contrast to GlaxoSmithKline, which now expects flat earnings this year, with the market forecasting a rise of 9% next year.
However, investors are focused on the longer term for AstraZeneca, with the company’s strategy of acquisition in order to overcome its patent woes proving popular among investors. For GlaxoSmithKline, though, the focus is on a much shorter timeframe and the company’s enviable drugs pipeline is not the key motivator for investors right now when, in fact, it could be argued that it should be. That’s because it will be GlaxoSmithKline’s pipeline that will be the main driver of the company’s future growth.
Despite GlaxoSmithKline’s update being disappointing today, it continues to offer better growth prospects, a better valuation and a better yield than AstraZeneca. For instance, GlaxoSmithKline trades on a price to earnings (P/E) ratio of 13.5, while AstraZeneca’s P/E is 17.6. The two companies’ yields, meanwhile, are 5.4% (GlaxoSmithKline) and 3.8% (AstraZeneca), again highlighting that GlaxoSmithKline is the more attractive investment at the present time.
Certainly, the allegations regarding bribery in China are causing a certain amount of share price weakness, as are doubts regarding the loss of patent protection on key, blockbuster drugs. However, GlaxoSmithKline has a strong pipeline, growth potential, a top-notch yield and is trading at a significant discount to a key peer in AstraZeneca. As such, it appears to be a great buy at present with a bright long-term future ahead of it.
Peter Stephens owns shares of AstraZeneca and GlaxoSmithKline. The Motley Fool recommends GlaxoSmithKline.