A quote from Albert Einstein, perhaps apocryphal, goes:
Everything should be made as simple as possible, but not simpler.
Investing is akin to predicting the future, but while I cant tell you exactly how the world will look in 10 years time, I can tell you what will be the same.
People arestill going to get sick and well need medicine to make us healthy again. Thats the crux of investing in pharmaceutical companies. Were investing in a future thats simple to understand, and more importantly, certain.
But lets not oversimplify here. For one thing, we need to sort our New Molecular Entities (NMEs) from our New Musical Express (one has slightly less of a drugs bent than the other). Then we need to decide which stock to load up on.
GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) is the UKs largest pharmaceutical company with annual sales of 27bn. Glaxos shares have fallen in 2014 on corruption allegations (later proven) in China. This will ultimately blow over. What Im more concerned with is the drugs pipeline.
Historically, the market has done a poor job of recognising the future value created by new medical treatments. Glaxos valuation looks attractive when you factor in the 40 NMEsin late stage clinical development, which will lead to new products and sales. Even assuming only modest growth the shares, with a 5.6% dividend yield, look attractively priced at around 14.
GSK spent 3.4bnof revenue on R&D last year. Its an investment in innovation. This promise and thrill is what investing is all about, but the market mistakenly treats R&D as a cost, hence the pricing anomaly. Sooner or later, new product launches and rising sales should lift the shares.
The UN forecasts that the worlds population will rise from 7.2 billion to 9.6 billion by 2050. Glaxo has identified emerging markets as a significant long-term opportunity. Rising incomes in countries such as China, India and Brazil will lead to increased demand for healthcare, and Glaxo has invested heavily to make sure it gets its piece of the pie.
An added bonusis that shares in pharmaceutical companiesarent as sensitive to the economic headwinds. The dividend has increased at a compounded 6% over the last five years an impressive track record. Although the company is being reshaped after warning on 2014 profits, the top class drugs pipeline and abulkedup vaccines business should eventuallybear fruit forshareholders.
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Mark Stones owns shares ofGlaxoSmithKline. The Motley Fool UK has recommendedshares of GlaxoSmithKline.We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makesus better investors.