The Big Pharma Pipeline Scare
When it comes to big pharmaceutical shares, the thing on many investors' minds these days is the fear of declining development pipelines. A patent on a drug only lasts so long, and though the profit margin is high while it does, there's only a limited period for all those mega-expensive research costs to be recouped and some profit stashed away.
Meanwhile, the world's generic drug makers are waiting in the wings, and slowly but surely taking over the manufacturing of out-of-patent drugs and selling them cheaply, meaning the days of Big Pharma are numbered. Well, that's what the doomsters say, anyway.
The trick, of course, is to keep profitable new drugs coming out of the research pipeline, but there's a real fear that, as the generic armoury gets ever stronger, the number of new blockbusters will decline -- an expensive new drug that's only a bit better than a dirt-cheap generic one is not going to turn into much of a cash cow.
All of that has served to depress the share prices of the pharmaceutical sector, with AstraZeneca (LSE: AZN) shares so low now that today's price of £29.80 represents a price-to-earnings (P/E) ratio of less than 8 based on 2012 forecasts, and there's a dividend yield of over 6% being forecast. Some see that as a buying opportunity, and I agree, but you know what it's like when the crowd is afraid of something.
The picture is a bit prettier at GlaxoSmithKline (LSE: GSK), though the same effect is still there. The share price fell on Tuesday after full-year results showed fourth-quarter revenues falling slightly short of City expectations. Glaxo shares have beaten the FTSE quite nicely over the past 12 months, but at £13.90, 2012 forecasts still suggest a dividend of 5.2% with a modest P/E of 11.5.
Fourth-quarter revenue came in at £6.98bn, which is little less than the £7.31bn that analysts had been forecasting, and represents a 2% fall. The company also announced a share buyback programme for next year of between £1bn and £2bn, and that will also have disappointed those investors who were expecting more -- some pundits were forecasting something nearer £2.5bn.
But even though revenues fell slightly, smaller overheads and restructuring costs put the quarter back in the black, with a £1.25bn net profit reported, against a £633m loss at the same stage last year.
Full-year net profit was up threefold, from £1.63bn to £5.26bn. And chief executive Andrew Witty expects Glaxo to return to full-year sales growth this year.
Pipeline looking fine.
But what of that all-important development pipeline? Interestingly, Glaxo is the only one of the big pharma companies to quantify its targets for return on R&D, setting a long-term goal of 14%. The current 12% figure is lower than that, but it's headed in the right direction.
And the current pipeline is actually looking pretty good, with some important drugs set to pop out of it in the near future.
While new oncology drug Votrient is already being prescribed for some cancers, and is under regulatory review for use in treating other forms, over the next three years there are up to 30 new drugs expected to enter late-stage development.
And of the 15 candidate drugs that had reached phase III trials by the start of 2011, Glaxo now has trial data for nine of them. One has already filed for regulatory approval, with more due in 2012.
Mr Witty added: "In addition, our quadrivalent flu vaccine, which was not included in the 15, has progressed very quickly and will also file very shortly. We expect Phase III development programmes to complete for a further six assets and indications this year. All this comes with increasing signs that we can replenish our pipeline on an ongoing basis."
Those six include the asthma treatment Relovair, and the Mosquirix malaria vaccine -- both of which are aimed at pretty major medical conditions.
Time to buy?
So are the fears of a pipeline meltdown and a world shunning new drugs in favour of cheap old ones overblown? In a word, yes.
And when fear rules a share price, it's time for rational long-term investors to make the most of it. What I've read today makes me more convinced that GlaxoSmithKline shares are cheap now, and the 5% dividend prospect is a reliable one.
Oh, and AstraZeneca shares are cheap too, despite lower forecasts for 2012.
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