It used to be that investors in big pharma had a straight choice between GlaxoSmithKline (LSE: GSK) (NYSE:GSK.US) and AstraZeneca (LSE:AZN) (NYSE: AZN.US). They remain the two largest firms in the pharmaceutical sector of the London Stock Exchange, so that thinking still lingers in most investors minds.
But GSKs CEO Andrew Witty has taken his company in a very different direction from Pascal Soriot at Astra. The two companies are no longer comparable, and it distorts the investment case to think of them that way.
The Unilever of healthcare
Mr Witty has de-emphasised the traditional big pharma strategy, whereby massive up-front investment in R&D aims to discover the next blockbuster drug to fund years of fat profits most notably through the recent asset-swap with Novartis. He argues that Western governments will eventually baulk at the cost of healthcare for an ageing population, so the next generation of drugs wont be so profitable. Perhaps the recent patent cliff scare also underlined the risky nature of prescription medicine.
So Mr Witty is emphasising global distribution of branded over-the-counter products and lower-margin vaccines, both of which play into growth in emerging market demand. Global consumer brands, low margins, emerging market growth, that sounds like the Unilever (LSE: ULVR) of healthcare. The two companies products even meet tangentially: there are markets where Unilevers Signal toothpaste is up against GSKs Aquafresh. The transition of GSKs Horlicks from a Victorian tonic to Indias leading health drink mirrors the trajectory of Unilevers Lifebuoy soap.
Biotech with a dividend
When Pascal Soriot took the helm in 2012 he committed AstraZeneca to just the science-heavy, R&D-led drug development that Andrew Witty is turning away from. Facing a steep and treacherous patent cliff, at the time I described Astra as like a biotech company with a dividend attached.
It still is, but three things have played to Mr Soriots advantage. To his credit, Astras scientists are delivering. Right now its creating a stir with immunotherapy, especially as a cancer cure. Secondly, biotech has become a fashionable sector. The thinking is that if you invent the drug, someone will pay for it. Thirdly, Pfizers aborted bid boosted Astras share price, which has remained elevated on the back of Mr Soriots bold confidence in Astras standalone earnings potential.
And the winner is
Which of Mr Witty and Mr Soriot will eventually be proved right? The lesson for investors is that we wont know until its too late. Investors shouldnt stake too much on guessing what the future holds. Rather they should pick stocks and plan portfolios to suit their circumstances.
Personally I like boring but safe GSK. Stocks like GSK and Unilever, which offer bond-like security in their payout whilst locking in emerging market growth, make good cornerstone shares.
Im wary of Astras valuation. Buoyed by lingering bid hopes, Mr Soriots big promises, and a biotech sector that could be in a bubble, I perceive bigger downside risk in the share price but thats countered by a bigger potential upside.
Both Astra and GSK offer good dividend yields, if little in the way of near-term dividend growth. That underlines their attraction to many investors, whether you want the income or want to re-invest and enjoy the compound growth in your holding.
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Tony Reading owns shares in GlaxoSmithKline and Unilever. The Motley Fool UK has recommended GlaxoSmithKline. The Motley Fool UK owns shares of Unilever. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.