The Motley Fool

Value investors can make a fortune from these FTSE 100 pharma stocks

In a recent article I looked at the FTSE 100’s gaggle of housebuilders, companies where the brilliant rewards on offer are not reflected by their meagre share prices.

If you’re looking for more top stocks carrying rock-bottom valuations (again, that translates to a prospective P/E multiple of 15 times or below) then the pharmaceuticals companies mentioned below should make for welcome reading.

In rude health

A blue chip medicines maker dominating the headlines around the back end of this week is AstraZeneca. I’ve long liked the business on account of its exceptional dividend record, and latest results released on Thursday assured me of its solid long-term profits outlook.

While the problem of patent expirations on some of its market-leading drugs remained a problem in the first six months of 2018, the hard work of its R&D teams to replace these revenue drivers is really starting to pay off. Indeed, AstraZeneca reported that total sales of its newer labels, including the likes of Tagrisso and Lynparza, jumped 75% year-on-year during January-June.

In the context of this article, AstraZeneca falls short, however, with the business sporting a heavy forward P/E ratio of 22.6 times. Thus share pickers on a small budget may want to give GlaxoSmithKline a close look, another company finally exorcising the demons of extreme patent losses through the successful development pipeline.

The drugs behemoth suffered a setback on Thursday after the US Food and Drug Administration rejected claims that its Nucala drug could be used to help Chronic Obstructive Pulmonary Disease (COPD) patients (it has already been signed off for asthma sufferers).

But such knockbacks remain few and far between and, thanks again to the hard work of its R&D teams, the firm’s revenues outlook has been transformed. Turnover from its new respiratory products, for example, rose 27% at constant exchange rates during January-June, it was also announced this week. A forward P/E ratio of 14.1 times fails to reflect its fast-improving earnings outlook, in my opinion, while its chunky 5.2% forward dividend yield adds a tasty sweetener.

Another great pick

Shire is another pharma share that, like GlaxoSmithKline, investors have been piling into with some gusto in recent months. And it’s no surprise given that the newsflow here has also been encouraging of late — the Irish firm saw group sales at constant currencies rise 3% during January-March, driven by a 10% uptick in comparable revenues from its rare diseases products.

It’s also little wonder the business has attracted the attention of Takeda Pharmaceutical Company, the Japanese business hoping to get the necessary shareholder approval and regulatory sign-offs in the near future to seal the £46bn acquisition of its FTSE 100 rival. This is no foregone conclusion, however, given the resistance to the takeover by many of Takeda’s shareholders.

Right now, Shire carries a forward P/E multiple of just 11.6 times. This leaves plenty of upside in my opinion as its promising drugs pipeline begins to deliver the goods.

Want To Retire Early?

Do you want to retire early and give up the rat race to enjoy the rest of your life? Of course you do, and to help you accomplish this goal, the Motley Fool has put together this free report titled "The Foolish Guide To Financial Independence", which is packed full of wealth-creating tips as well as ideas for your money.

The report is entirely free and available for download today, so if you're interested in exiting the rat race and achieving financial independence, click here to download the report. What have you got to lose?

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended AstraZeneca and Shire. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.