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Forget small-caps! I think FTSE 100 pharma investors will profit most from coronavirus tests

I believe FTSE 100 pharmaceutical heavyweights AstraZeneca and GlaxoSmithKline will be the biggest winners from the rapid increase in UK coronavirus testing.

Why do I say that? Let me point you to Sir Kier Starmer’s first appearance as Labour leader at Prime Minister’s Questions. It was generally regarded as a solid debut. The former director of public prosecutions tore into First Secretary Dominic Raab for the government’s lack of activity to increase coronavirus immunity testing.

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The Department of Health target is 100,000 tests per day by the end of April 2020. However, it has a capacity of only 40,000 tests per day, Raab said. Furthermore, fewer than 20,000 tests per day are being carried out each day at present.

Whatever your political leaning, we can all agree that analysis of workers’ Covid-19 immunity will be vital for reopening the shuttered UK economy.

Starmer’s line of questioning teased out some interesting detail from Raab. He highlighted that AZN and GSK are setting up the next major Covid-19 testing laboratory at Cambridge University. This news has broad financial implications for the two FTSE 100 companies.

FTSE 100 FTW

Coronavirus testing has become something of a gold rush in the UK. Several small AIM-listed companies are investing heavily in new biotech projects. And investors thick with cash are piling in to relative unknowns on promise alone.

Shares in the Anglo-French firm Novacyt, for example, are up 2,750% since the start of 2020. But I contend that FTSE 100 pharma giants are much more likely to improve their earnings with large government contracts.

AstraZeneca and GlaxoSmithKline’s new laboratory at Cambridge University is “for high throughput screening of Covid-19 testing”, says a press release. It will “explore the use of alternative chemical reagents for test kits in order to help overcome current supply shortages“.

Even if life sciences minnows wanted to, they could not achieve the necessary processes fast enough to command the scale that governments require.

Only the FTSE 100 pharma giants have the industry contacts, economies of scale, and supply chain depth to produce the required millions of tests per month.

This is why UK government contracts tend to go to the same players all the time. That includes Capita for IT or G4S for security. No matter that these examples are often heavily criticised for their evident shortcomings.

Dividend certainty

There is also the question of dividends. Yes, an investment in Novacyt or its AIM-listed alternatives may produce some short-term capital gains. But no dividends. And small-cap prices are also prone to extreme volatility.

By contrast, my two picks are defensive choices that have rapidly bounced back from the market bottom on 19 March 2020.

In addition, we are witnessing wide-scale FTSE 100 dividend suspension. In the worst case scenario, the index’s average yield will fall from 4.35% in 2019 to just 2% in 2020.

GSK is widely regarded as one of the safest dividend payouts on the FTSE 100. For example, CEO Emma Walmsley doles out a 5% yield per share every year like clockwork. AstraZeneca pays out $2.80 per share annually without fail. Dependable is best. This is where I, and the government, can place our faith for the future.

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Tom Rodgers owns shares in GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. 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.