GlaxoSmithKline (LSE: GSK) and Shire (LSE: SHP) would be my pick of the pharmaceutical companies to invest in at the moment. While GSK is a dividend investment, Shire is a growth play. Lets look at each company in turn.
GlaxoSmithKline
Glaxo is one of the worlds largest pharmaceutical companies, with strengths in asthma, cancer, diabetes and digestive diseases. It has been a firmrenowned as havingone of the strongest drugs pipelines in the pharma industry.
Yet in the last few years it has not quite lived up to expectations. Last year the company was damaged in one of its fastest growing markets by the bribery scandal in China. Salesof several blockbuster drugs have fallen as their patents have expired, while newly launched drugs, although selling well, have not matched the big sellers of yesteryear.
Yet this remains one of the most innovative healthcare businesses in the world. I think what GlaxoSmithKline and the rest ofthe pharmaceutical industry is learning, just like the TV industry learnt before it, and supermarket retail is learning now, is how to adapt to the world of the long tail.
You see, in the pastmany drugswere so popular they sold more than the rest of the market put together. You can think of Zantac and Losec as the Jewel in the Crown and Upstairs Downstairs of pharma. These drugs sold in their millions, and made drugs companies billions.
But today if you want to buy a drug because you are suffering from a bit of heartburn, alongside Zantac and Losec you have Nexium, Dexilant, Reglan and perhaps a dozen other branded drugs. The days when one drug grabbed the bulk of the market are gone.
Thats why I think that traditional pharmaceuticalcompanies such as GSK are unlikely to grow quickly. But theyare still highly profitable, andgenerateprodigious amountsof cash. Thats why they are the ideal dividend shares. Glaxo is currently on a 2015 P/E ratio of 16.4 with a dividend yield of 5.2%. Thats a high yield, which is well covered by profits. I view this as a strong dividend buy.
Shire
One of the tragedies of the past was that if you suffered from a rare disease, the likelihood was that there would be no treatment. These days, things are different. Shire isa business built upon the idea that you produce targeted treatments to awide variety ofdiseases by use of the latest science and biotechnology.
Shire, instead of beinga pharmaceutical titan,is really anetwork of smaller companies, each designed to tackle a particular ailment. You see, myriad rare diseases now have myriad treatments. And the world of the long tail is about a lot more than spaghetti sauce or TV programmes.
Who would have thought that such an apparently disparatebusiness would be so successful and so profitable? The earnings per shareprogression shows how quickly this company is growing:
2011: 97p
2012: 86p
2013: 148p
2014: 229p
2015: 245p
A 2014 P/E ratio of 22.0, falling to 20.6 in 2015 sounds expensive, but I think this is a clear growth buy.
I see GlaxoSmithKline as a worthy addition to your high-yield portfolio. We at the Fool think that dividendshares should be a cornerstone of your investing approach, and we have written aneasy-to-read, practicalguide all about this key technique.
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Prabhat Sakya has no position in any shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.