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GlaxoSmithKline plc Beats AstraZeneca plc And Shire PLC In The Pharmaceuticals Stakes

AstraZenecaPharmaceuticals companies have been big in the news in recent months. Pfizer’s bid for AstraZeneca (LSE: AZN) (NYSE: AZN.US) pushed the share price skywards, and in the other direction GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) took a hammering after releasing a profit warning. Shire (LSE: SHP), meanwhile, has seen its share price double over the past 12 months.

But which company is best?

Here’s a fundamentals snapshot of the big three:

  GlaxoSmithKline AstraZeneca        Shire       
EPS growth 2013 +1% -26% +77%
P/E 2013 14.4 11.9 18.7
Dividend Yield 2013 4.8% 4.7% 0.4%
Dividend Cover 2013 1.44x 1.80x 12.9x
EPS growth 2014*
-15% -13% +25%
P/E 2014 14.5 15.7 24.7
Dividend Yield 2014 5.9% 4.1% 0.3%
Dividend Cover 2014 1.17x 1.57x 11.9x
EPS growth 2015* +6% -6% +10%
P/E 2015 13.7 16.8 22.5
Dividend Yield 2015 6.1% 4.1% 0.4%
Dividend Cover 2015 1.19x 1.46x 11.7x

* forecast

New boss

AstraZeneca’s big strength is Pascal Soriot, the chief executive who stormed into the top job in October 2012 like a whirlwind. Pledging to return the company to its core strengths of scientific leadership in mainstream drug development, Mr Soriot has been refocusing and pouring cash into beefing up the development pipeline.

And it’s paying off. At first-half time the firm had 14 projects at Phase III, up from 8 a year previously, with a number of new cancer drugs looking very promising.

AstraZenenca shares have not quite subsided from the aborted Pfizer bid, and at 4,117p they’re up 25% over 12 months and on a forward P/E of nearly 16. But with the potential that’s there, I don’t think that’s too bad at all.

What about Shire?

Then there’s relative upstart Shire. Registered in Jersey and headquartered in Ireland, it’s enjoying something of a surge. Earnings per share (EPS) grew by 77% last year, and is up eight-fold since 2008! We’re clearly looking at a great growth story, with the shares doubling to 4,735p in a year, so what’s the bottom line?

Well, Shire is in the process of being taken over by AbbVie Inc, which will provide Shire shareholders with £24.44 in cash plus 0.896 new AbbVie shares per Shire share — valuing Shire at around £53 per share. Shire, then, is not one for long-term investors to consider.

A Glaxo bargain?

That leaves us with GlaxoSmithKline, which I think is showing the most attractive fundamentals in the table above.

GlaxoSmithKlineThe profit warning issued at interim time, suggesting that 2014 core EPS is only likely to be “broadly similar to 2013“, was disappointing. But some of that was due to the strengthening of the pound — it’s up 9% against the dollar over the past 12 months, and that will hurt any multinational company reporting in sterling.

Dividend cover looks like it’s getting a little stretched, but EPS is erratic in this business and the big players can easily cope with low cover for a couple of years — in fact, in 2010 Glaxo paid out a dividend of 65p even though EPS was recorded at only 54p that year. It’s a slight concern, but not a big worry.

The best

So my choice? I actually think GlaxoSmithKline and AstraZeneca are both looking attractive, but Glaxo’s growing dividends, lower P/E valuation, more developed pipeline and lower uncertainty make it my pick of the sector.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool has recommended GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.