George Salmon 10 November 2017
Drugs sales span the four corners of the world, making pharmaceuticals a truly global business.
With three giants worth a collective £160bn featuring heavily at the business end of the FTSE 100, the UK certainly plays its part.
Below I take a look at where each of these companies stands.
While GlaxoSmithKline comes with a double dose of consumer goods exposure, and Shire investors will have one eye on the balance sheet (more on these below) the focus at AstraZeneca is arguably where it should be in pharma: on the labs.
In some ways, this makes it the most straightforward of the UK’s three pharma giants. However, CEO Pascal Soriot’s ambitious plans mean there is still plenty going on behind the scenes.
In 2014, Mr Soriot announced plans to near enough double revenues by 2023. Adding $20bn of sales would be impressive in normal circumstances, never mind with the loss of patent protection on key products. The expiration of the patent for cholesterol treatment Crestor, for example, means sales in the first four years of the transformation have gone backwards.
The dividend has been maintained during this lean patch, with Astra flogging rights to fringe drugs or early stage assets to tide it over. However, this can’t go on forever. Astra needs to get more trials through clinical tests.
Hopes had been pinned on the group’s attempts to combine Imfinzi and Tremelimumab to create a new immuno-oncology combination. Unfortunately it wasn’t to be. While a PhD might be needed to understand the finer details of why the drugs don’t work, the repercussions of the failed MYSTIC trial are clear enough for investors. If approved, analysts were hoping it could add over $7bn a year to sales.
MYSTIC aside, Astra has a good record. Recently approved drugs Tagrisso and Lynparza are growing revenues nicely, and the group has a strong potential pipeline. This likely supports the 17.7 PE ratio, the highest of the UK’s three big pharma players.
Analysts expect revenues to rise steadily from here on, but investors may have to wait another year or two for the first signs of a dividend increase.
Still though, the prospective yield of 4.2% provides a clear attraction to income-seeking investors in the current climate.
Despite recent share price weakness, GSK retains its position as the UK’s biggest pharma company. Just. The gap between GSK and Astra is now just £2.5bn, not much in the scale of things.
While Astra and Shire offer straight-up pharma exposure, GSK has a differentiated offer. It has a sizeable vaccines business and the consumer division, a joint venture with Novartis, includes brands from Sensodyne to Panadol and contributed 26% of revenues last year.
Many investors, including the likes of Neil Woodford, have tried to convince GSK to split. The departure of long-serving CEO Andrew Witty had been seen as a possible catalyst, but the new head, Emma Walmsley, has distanced herself from this possibility.
So, the consumer division looks like it’s here to stay. It could get bigger too. The new CEO has far from ruled out picking up assets from Pfizer and Merck, while Novartis has the option to sell its 36.5% stake in the joint consumer division to GSK by March next year.
But is this a bad thing?
The consumer business has seen solid growth in revenues and profitability in recent years. In fact, aside from the recently approved Shingles vaccine Shingrix and the HIV treatments in final stage tests, GSK’s pharma pipeline is lagging a touch behind the others.
The new CEO’s strategy is to narrow GSK’s focus, and it has already shuffled away from 30 research programmes. In future, 80% of R&D spend is to be allocated between established divisions Respiratory and HIV/infectious diseases, and two potential growth areas: Oncology and Immuno-inflammation.
While we’ll have to wait and see if we get results from the labs, pharmaceuticals cash flows in the here and now are weak. This means investors are likely grateful for the brand-led consumer portfolio, which is helping to support the dividend. The current prospective yield is 6%, while the shares trade on 16.9 times expected earnings.
A few years ago, Anglo-Irish group Shire was facing a problem. While sales of blockbuster ADHD treatment Vyvanse were still growing, the question of what happened when the patent finally expired was a pressing one.
For answers, management focused their search on deal-making. Initially, it looked like Shire itself would be a target, but a proposed tie-up with American giant AbbVie fell through. This led Shire to put the boot on the other foot.
The first step was the $5.2bn acquisition of NPS, which was swiftly followed by the $32bn Baxalta deal. At current exchange rates, the sum of these two price tags equates to around 85% of the current market cap, showing how crucial the successful integration of these rare disease specialists is for Shire.
While a niche focus should help Shire avoid some of the intense competition in the sector, Baxalta was also at the other end of the development spectrum at the time of the deal. With numerous products either recently launched or in the latter stages of development, revenue growth should be impressive in the next few years.
The early signs have been promising. Cost saving synergies are now set to exceed $700m a year, comfortably ahead of the original $500m+ guidance. All the while, profits have risen handsomely.
However, the cloud hanging over the group is the debt it took on to finance the deals. Despite falling $2.1bn so far this year, Shire’s net debt position is still over $20bn. This means that analysts expect the group’s dividend to remain at token levels for now.
Limited near-term dividend prospects, plus the ongoing task of integrating Baxalta mean the shares trade on the lowest rating of the three, at 9.1 times expected earnings.
Please note: George Salmon owns AstraZeneca shares
Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.
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