Pharma Showdown: Should You Buy GlaxoSmithKline plc Or Shire PLC?

If you’re struggling to choose between GlaxoSmithKline (LSE: GSK) and Shire (LSE: SHP), you’re not alone.

Glaxo and Shire are two of the UK’s premier pharmaceutical companies, with their individual strengths and weaknesses. 

And choosing between the two is a tough task.  

Lacklustre growth 

There’s only one way to describe Glaxo’s growth: slow and steady.

Management expects 2015 core earnings per share to decline at a percentage rate “in the high teens” as sales of key drugs continue to fall.

However, new treatments will start to work their way through the company’s treatment pipeline by 2016.

As sales of these new products begin to grow, management believes that group’s revenue will grow at a low-to-mid single digit percentage per annum from 2016 to 2020. Core earnings per share are expected to expand at a rate in the mid-to-high single digits during the same period. 

High income 

As I’ve mentioned before, according to my figures, assuming a 7% per annum growth rate through to 2020, Glaxo is on track to earn 111p per share for full-year 2020. 

This indicates that Glaxo is trading at a 2020 P/E of 13.2, which seems expensive for such lacklustre growth. 

Still, Glaxo’s dividend yield makes up for the company’s lack of growth. Based on current figures, Glaxo currently supports a dividend yield of 5.7% and the payout is covered 1.2 times by earnings per share. Management has stated that the company’s dividend payout will be maintained at 80p per share for the next three years. 

So overall, for income investors, Glaxo is a top pick, although growth investors will be left wanting more.  

On the other hand, Shire is a top growth stock.

Accelerating growth 

Over the past five years, Shire’s growth has exploded. Indeed, City analysts expect the company to report earnings per share of 247p for 2015, 250% higher than the figure reported for 2010. 

But the company is not content with this impressive organic growth rate. Management is on the hunt for acquisitions to boost growth and it has been reported that Shire recently made a £12bn bid for its peer, Actelion of Switzerland. 

According to news reports, Actelion — which makes treatments for rare diseases — has rejected Shire’s initial approaches. However, there’s nothing to stop Shire coming back and making another offer. 

Shire has already completed one acquisition this year, a $5.2bn deal for NPS Pharmaceuticals. NPS specialises in treatments for rare diseases and one has one drug approval for sale at present.

Costly shares 

Excluding extraordinary items, Shire’s earnings per share are set to expand by a high double-digit percentage this year. Further growth of 17% is expected during 2016. 

Unfortunately, this means that the market has placed a high valuation on the company’s shares. 

Shire is currently trading at a forward P/E of 21.9 and a 2016 P/E of 18.9. However, the company’s dividend yield leaves a lot to be desired.

Shire offers a token yield of 0.3%, although the payout is covered 24x by earnings per share. According to analysts, Shire’s payout is set to grow by 50% during the next two years as Shire returns more cash to investors. 

It’s up to you

Overall, Shire and Glaxo are two different companies for two different types of investors. Shire is a growth stock, with its best days ahead of it. Glaxo has become the perfect stock for income investors, although the company’s glacial growth rate leaves much to be desired.

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Rupert Hargreaves owns shares of 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.