British Pharmaceutical Companies Lag Global Peers

Which pharmaceutical companies have revenue generating drugs in the pipeline? And how to GlaxoSmithKline and AstraZeneca fair against their US and European counterparts?

Damien Conover, CFA 4 November, 2014 | 9:30AM
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Patent protection remains a core source of the wide moat ratings for most of the big pharmaceutical firms. A company’s ‘moat’ is its competitive advantage over its peers.

Strong pipelines and slowing patent losses over the next five years should accelerate the growth rates of the large pharmaceutical stocks and increase the returns on invested capital. Two key themes strengthening the pipelines are shorter drug development times and increasing exposure to biologics.

Leading the group, Sanofi (SAN) and Merck (MRK) look best positioned based on the strength of their pipelines, currently marketed products, and patent losses over the next five years. Sanofi’s strengthening pipeline, with a portfolio of steadily increasing products, more than offset limited generic competition to long-acting insulin Lantus.

Lagging the group, Pfizer and GlaxoSmithKline face significant challenges for growth.

Both companies lack strong pipelines and face major competitive threats; branded and generic competition to Glaxo’s top drug Advair for respiratory disease and generic competition to Pfizer’s top drugs Celebrex for pain and Lyrica for neuroscience indications.

AstraZeneca (AZN)

Moat Implications: Reiterate wide moat and negative trend

Valuation Implications: Reiterate $58 fair value estimate

As AstraZeneca’s major products lose patent protection, the company is improving its research and development productivity. However, we have not seen enough improvement to change the negative trend. Nevertheless, the company’s Phase II pipeline is the strongest it has been in several years.

We believe investors are underappreciating Forxiga in diabetes, but we are much lower than management’s guidance and consensus on several pipeline drugs.

As a reminder, management guidance was revealed during Pfizer’s bid to acquire the company, so it may have been pushed to lean toward the high end of estimates.

GlaxoSmithKline (GSK)

Moat Implications: Reiterate wide moat and stable moat trend

Valuation Implications: Reiterate $51 fair value estimate

Over the next five years, GlaxoSmithKline faces one key patent risk: generic competition to Advair which makes up 20% of sales. While the complexity of creating generic respiratory drugs like Advair should continue to limit major generic competition until the device patent expires in 2016, branded, and some limited generic, competition is intensifying, causing this key drug to decline. Excluding Advair, Glaxo carries a very diverse portfolio of drugs with no other drug representing an outsized contribution to sales, which should stabilise returns. Also, the company’s steady consumer and vaccines units should further help mitigate the respiratory headwinds.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
AstraZeneca PLC12,174.00 GBX-0.70Rating
GSK PLC1,516.50 GBX-0.52Rating
Merck & Co Inc124.97 USD-0.58Rating

About Author

Damien Conover, CFA  is an equity analyst and associate director at Morningstar.

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