Are GlaxoSmithKline plc & AstraZeneca plc Really On The Road To Recovery?

GlaxoSmithKline (LSE: GSK) and AstraZeneca (LSE: AZN) are two of the FTSE 100’s most controversial companies. On one hand, the pharma giants are two of the world’s premier biotechnology companies, with impressive profit margins, treatment pipelines and above-average dividend yields. 

On the other hand, there are concerns that Astra and Glaxo’s treatment pipelines won’t translate into sales growth. What’s more, around a quarter of Astra’s sales are at risk over the next three years as a number of the company’s key drugs lose patent protection.

City analysts are also concerned that Glaxo’s dividend is unsustainable and the company will struggle to meet its target of double-digit earnings per share growth for next year.

Making plans

Astra’s management is quite upbeat about the company’s prospects and believes that the company has what it takes to return to growth by 2017. Similarly, Glaxo’s management believes that the company is set to return to growth next year, but the group’s earnings will contract slightly for 2015.

Specifically, based on current projections, Glaxo’s revenue is expected to grow at a compound annual growth rate of “low-to-mid single digits” over the five years from 2016 to 2020.

Over the same period, core earnings per share are expected to expand at a rate in the “mid-to-high single digits”. Admittedly, a large part of Glaxo’s earnings growth will come from the cost savings. The group is on track to achieve annualised cost savings of £3bn by the end of 2017, which should de-risk some growth and help the company maintain its dividend payout at 80p per share for each of the next three years. 

And one of Glaxo’s most attractive qualities is the company’s diversification. 40% of group revenues come from vaccines and consumer health products rather than prescription drugs. This means that Glaxo can weather a fall in sales of prescription drugs but ultimately, the group’s long-term success depends on its ability to bring new prescription drugs to market. 

Here, the group is making some progress. Management has flagged a pipeline of 40 new drugs in advanced clinical trials and rapidly rising sales of HIV/Aids drugs. Half of the 40 treatments currently undergoing trials should be on the market by 2020. 

Astra’s outlook is cloudier. Unlike Glaxo, the company doesn’t have a consumer health and vaccines business to offset falling prescription drug sales, so the group is dependent upon the success of its treatment pipeline to drive growth.

Luckily, City analysts believe that Astra’s treatment pipeline is robust enough to return the group to growth by 2017. According to analysts, Astra’s new product sales could top $21bn — 90% of existing sales — by 2022 in a best-case scenario. 

On the road to recovery? 

Overall, Glaxo and Astra do seem to be on the road to recovery but only time will tell if the companies have done enough to return to growth. Treatment pipelines should start to yield results within the next 12 to 24 months, which should give investors more information on the progress of Astra and Glaxo’s recovery. 

Still, investors will be paid to wait for this recovery as Astra currently supports an attractive dividend yield of 4.1% and Glaxo yields 5.9%.

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Rupert Hargreaves owns shares of AstraZeneca and GlaxoSmithKline. The Motley Fool UK has recommended AstraZeneca and 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.