So, we’ve had the final results from Holy Trinity of the UK pharma industry – AstraZeneca PLC (LON:AZN), GlaxoSmithKline plc (LON:GSK) and Shire Plc (LON:SHP).
But which is best? Misquoting TV comic Harry Hill: “There’s only one way to find out….some good old fundamental analysis!”
Ahem, anyway let’s move on and have a look at our trio of druggies.
Dividend
Pill pushers tend to be hugely cash generative businesses, which means they are able to sustain and grow the pay-out. It is difficult to choose between AZ and GSK on the basis of the dividend yield (4.7% vs 5%). Both pay way more than Shire, which of course is still picking up the tab for the US$32bn acquisition of Baxalta.
Bargain buy
On a forward earnings multiple, again there is nothing between GSK and AZ (15 times 2017 EPS vs 15.6). Shire, however, comes in significantly cheaper at just 13 times – with that comes underlying earnings growth of 11% this year. GSK is forecast to increase its EPS by 8%, while AZ looks set to move into reverse gear.
Bye, bye blockbusters
Again, AZ and GSK are in a similar boat in losing big, big products to copycat generic competition – cholesterol buster Crestor and asthma drug Advair respectively.
Shire, by contrast, brought four new drugs to the market, the most successful of which was Xiidra, which since August has claimed 19% of the dry eye disease market.
One thing to remember is Shire focuses on the rarer disease areas where patient groups tend to small. It means the revenues generated per product tend to be a fraction of some of the big, billion dollar-plus blockbusters out there. That said, having scores of drugs on sale versus a couple mega-sellers makes the business far less vulnerable to competition safety scares.
The pipelines
So, this a numbers game. As you might imagine, with top sellers soon to be supplanted by cheap competition drugs, AZ and GSK are looking for replacements. And after years of seeming inertia, their respective R&D departments appear to making some headway.
AZ now has 132 projects in the pipeline, with 12 in the late stage of development.
New products at GSK are now starting to pick up the slack that will be left with the drop-off in Advair sales. They delivered US$1.4bn of sales in the quarter, or 27% of total turnover.
As mentioned above, Shire brought through four new products last year. An attention deficit drug is likely to be the next cab off the rank in 2017, followed by treatments for hypoparathyroidism and von Willebrand disease (an inherited bleeding disorder).
Risk factors
The biggest single company risk resides with Shire and how it tackles the integration of Baxalta, which effectively doubled the company’s size. Deals of this scale are rarely plain sailing.
With AZ and GSK the disappearance of blockbuster products has largely been factored into the respective valuations. The downside is the competition may bite more quickly and savagely than predicted. That said, for GSK at least, analysts are now wondering whether they have been too pessimistic with forecasts for Advair sales.
City opinion
We looked at the Brokerforecasts site, which tracks analysts recommendations.
• Of the 18 number crunchers following AZ, 10 have ‘buy’ recommendations, while there are three ‘sellers’. The rest have ‘neutral’ calls.
• There are 17 analysts logged as following GSK and eight are positive on the stock, with only two ‘sellers’.
• The City really likes Shire with all bar one of the 14 scribblers following the company a ‘buyer’. The outlier is ‘neutral’ on the stock.
So where does that leave us?
Well, if it’s income you want then both GSK and AZ tick that particular box. Forget AZ if you are looking for growth; Shire wins on that basis.