Here are the three giant UK-based pharmaceutical companies that we believe represent opportunities for investors.
GlaxoSmithKline
Under recently-retired chief executive Jean-Pierre Garnier, Glaxo has developed one of the most impressive drugs pipelines around, with 34 compounds in late-stage development.
Another key to the company's attractiveness is its undervalued drugs, including Cervarix, which treats the human papilloma virus (HPV) or genital warts, and Promacta, which treats a rare blood disorder. According to Collins Stewart analyst Navid Malik, Cervarix, once it has been approved by the Food and Drug Administration (FDA), has the potential to deliver annual revenues of $3bn (£1.53bn) due to its superiority over its competitor, the Merck/Sanofi drug Gardasil. Mr Malik says that the clinicians he is speaking with say Cervarix is more effective against a wider range of HPV-related conditions and lasts longer than Gardasil.
Earnings growth potential in the short term is also reliant on Avandia (for type 2 diabetes), as well as the group's antiviral flu treatment Relenza, which more than justify the stock's current PE ratio of about 12 times and dividend yield of close to 4 per cent.
Shire
Opinions are divided over whether the specialist pharmaceutical company's new attention deficit hyperactivity disorder drug, Vyvanse, will adequately replace its current blockbuster, AdderallXR. We agree with Dr Malik that Shire's earnings over the next five years are set to take off. His estimates suggest that the company’s post-tax profits are likely to grow 18 per cent a year for the next five years. Vyvanse has key advantages over AdderallXR, Shire's blockbuster product of recent years. It is safer and only needs to be taken once daily, rather than twice.
The company also has a number of other niche products that are hard to replicate. These include its treatment for Hunter Syndrome, a serious genetic disorder that primarily affects men. It affects about 2,000 people world-wide, 500 of whom live in the US.
"With Hunter Syndrome, there isn't the choice of five different drugs. So they don't require the heavy marketing that other drugs do. The only way of treating it is to replace the missing enzyme, which Shire's treatment does," says Evolution Securities analyst Peter Cartwright.
Trading on a one-year forward PE ratio of 14.5 times, the growth from lead product, Vyvanse, and the stable earnings from its portfolio of drugs are arguably not reflected in the share price.
AstraZeneca
AstraZeneca has been much maligned for not having a late-stage drugs pipeline of consequence – especially after its $15.2bn acquisition of biotech MedImmune last year.
In October 2006 its share price was over £35 but by March of this year it traded at close to half that. It has since recovered, trading at £24.33, but investors have watched as profits have been eroded due to competition from low-cost generic drug providers as its major blockbuster drugs go off patent. Sales of Nexium were $1.24bn (£620m) during the three months to end-March, a 5.4 per cent decline from a year earlier. Revenues from its other big-selling drugs, Seroquel (psychotic disorders) and Crestor (cholesterol), were also below many analysts' expectations.
We believe AstraZeneca will experience continuing modest short-term earnings growth. But, trading on a forecast PE ratio of close to 11 times, the market's rating on the stock is unduly conservative. MedImmune has a drug on the market and there is another drug for which it has just filed for approval. It was an expensive acquisition, but that is already reflected in the share price. For more on AstraZeneca, .
