Businesses that dont investforthe future struggle to survive over the long term. And the companies that spend the most on research and development often have the best growth prospects. These companies are able to attract the best talent and investment capital, two traits that will only boost growth prospects.
In the pharma industry, the research and development of new treatmentsisessential to growth and AstraZeneca (LSE: AZN) is leading the field in terms of research funding.
Indeed, during 2014, AstrasR&D spending as a percentage of sales jumpedby a double-digit percentage. The companys peers, industry behemoths J&J, Roche, Bayer, Sanofi,Lillyand Pfizerall increased R&D spendingby 3% to 5%, in linewith sales growth.
GlaxoSmithKlines (LSE: GSK) R&D spending as a percentage of sales actually fell by a double-digit percentage as the company struggled to cut costs in an attempt to boost margins.
Starting to yield results
Astras devotion to R&D spending is really starting to show up in the companys treatment pipeline and number of drug launches.For example, the company amazed the market last year when it broke records for the number of treatment approved for sale by regulators in the space of twelve months.
However, Astras sales are set to continue falling this year as the company grapples with the sliding sales of its blockbuster Crestor drug. But this is expected to be the companys last year of sales declines.
New treatments are expected to re-ignite sales growth from 2016 onwards and Astras management believe that the company can rack up annual sales of$45bn by 2023 almost double the level reported for 2014.
Glaxo isnt following the same path. In fact, Glaxo is transitioning into a consumer goods company as the group focuses onconsumer healthcare assets and vaccines.
Granted, these arent the most exciting sectors to be involved in, but they are extremely important to the company, and theyre essential to everyday life.
Overall, Glaxo is taking a relatively safe routewhile Astra chases growth with hefty spending on R&D to try and enhance its treatmentpipeline.
Unfortunately, Astras bright prospects mean that investors are willing to pay a premium to get their hands on the companys shares. Astra currently trades at a forward P/E of 16.6, which may seem expensive to some but its a premium worth paying for the companys long-term growth prospects.
Difficult to choose
Its almost impossible to choose between Astra and Glaxo. The two pharma giants each have their own strengths and weaknesses.
As Astra chases growth, Glaxo is becoming more defensive and the companys dividend yield, which currently stands at 5%, is hard to pass up.
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