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GlaxoSmithKline plc vs AstraZeneca plc: Which Pharmaceutical Major Should You Add To Your ISA?

Since the turn of the year, GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) has easily outperformed AstraZeneca (LSE: AZN) (NYSE: AZN.US), with the former’s share price rising by 14% compared to a gain of just 3% for the latter. Of course, this is only a three month period but, nevertheless, could it be the start of a sustained period of outperformance by GlaxoSmithKline? Or, is AstraZeneca a better buy than its sector peer?

Creating Value

Looking ahead, the two companies intend to create shareholder value in slightly different ways. In the case of AstraZeneca, it plans to continue the policy it has adopted in recent years of acquiring smaller entities in order to improve its long term pipeline potential. This is a sound strategy which should bode well for the long run, with AstraZeneca having only a moderate level of balance sheet gearing and very strong cash flow which will allow it to maintain a relatively high frequency of purchases.

In contrast, GlaxoSmithKline is planning on spinning off at least one subsidiary and also entering into agreements with other major pharmaceutical companies to jointly develop new products. For example, it entered into an agreement with Novartis to create a consumer healthcare business in which GlaxoSmithKline has a majority stake. This should allow it to spread capital and risk more effectively, which could prove to be a shrewd move in the long run.

Investor Sentiment

As mentioned, investor sentiment in GlaxoSmithKline has picked up in recent months, as the market begins to warm to the company’s growth and cost cutting strategy. Of course, an additional reason why GlaxoSmithKline’s shares have risen faster than those of AstraZeneca is the fact that it trades on a more appealing valuation to its sector peer. For example, GlaxoSmithKline has a price to earnings (P/E) ratio of 16.6, while AstraZeneca’s is slightly higher at 17.1. As such, there is greater scope for an upward rerating of GlaxoSmithKline’s shares moving forward.

Furthermore, GlaxoSmithKline has arguably had more challenging news flow to address than AstraZeneca in recent years. For example, it was embroiled in allegations of bribery for much of the last couple of years, which dampened investor sentiment at the same time as AstraZeneca enjoyed an uplift from bids and bid rumours. Moving forward, it could be the case that GlaxoSmithKline sees its share price move higher at a faster pace than AstraZeneca simply due to a new period that includes a lack of negative news flow surrounding its operations.

Looking Ahead

While both companies offer considerable future potential, GlaxoSmithKline continues to offer a greater breadth of appeal than AstraZeneca. For example, it has a lower valuation, a sound strategy and is likely to enjoy a period of improved news flow relative to its peer than it has done in recent years. As such, and while both companies are worth buying, GlaxoSmithKline seems to be the one to buy first at the present time.

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Peter Stephens owns shares of AstraZeneca and GlaxoSmithKline. The Motley Fool UK 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.