FTSE 350 Review: Will GSK replace Astra as the investor favourite?

Given lengthy drug approval timelines and extensive research and development (R&D) requirements, it’s little wonder that the pharmaceutical industry can be somewhat slow-moving. It can take many years, sometimes decades, for a scientific advancement to be transformed into a commercial product. But in the years since the pandemic, there has been rapid change across the sector.

The world’s most valuable pharmaceutical company in terms of market capitalisation is now Eli Lilly (US:LLY), largely thanks to a weight-loss drug that was virtually unheard of five years ago. Here in the UK, we could be in the midst of a realignment of our own.

For years, AstraZeneca (AZN) has been analysts’ favourite London-listed pharmaceutical group, thanks in large part to its world-leading portfolio of cancer drugs. Meanwhile, the country’s other blue-chip drugmaker, GSK (GSK), established a reputation as a chronic underperformer. The group’s pipeline of new drugs has been criticised for its shallow breadth next to industry peers, and it has had to contend with legal threats regarding heartburn medication Zantac. 

But UBS analysts recently forecast a reversal of fortune for both groups. Last month they issued a sell rating for AstraZeneca – citing concerns over the impact of US drug pricing reforms on future profits. It concurrently moved GSK from a sell to a buy following the strong recent launch of Arexvy, a vaccine against the respiratory syncytial virus (RSV). 

The broker also forecasts stronger-than-expected sales of GSK's already established Shingrix shingles vaccine in China, where it launched at the start of this year.

But with its shares trading on just over 10 times projected earnings for 2024, it’s safe to assume that investors are still wary about ongoing Zantac litigation. The company has settled many of the cases, in which US consumers allege long-term use of the drug caused them to develop cancer. The next hearing on the remaining cases is scheduled for late January, after this article went to press, and a trial could potentially commence in February if some of these remain unresolved.

Indivior (INDV) is another London-listed company that knows the pain of prolonged litigation all too well. The company, which manufactures a handful of drugs for opioid use disorder, saw its shares jump in June after it settled a longstanding US antitrust lawsuit.

The stock soon struggled again, largely because legal costs are still weighing on the balance sheet. At the end of Q3, the group’s cash and investments totalled $774mn, down from $991mn a year earlier, following the acquisition of a smaller rival and legal outflows of $207mn. With the bulk of its legal claims settled in October, much of the group’s share price trajectory for this year depends on its ability to grow sales of Sublocade, its newest opioid addiction treatment. 

With more than 80 per cent of its sales made in the US, Indivior’s profits are also at the mercy of government price control regimes. There’s some evidence that an adjustment to the Medicaid public health insurance programme has already slowed sales of Sublocade.

With a significant presence in emerging markets, generic drug manufacturer Hikma (HIK) is less threatened by US regulation. Geographic diversification is a virtue for the company, whose operating resilience helped its shares produce a total return of 18 per cent last year, despite the devaluation of the Egyptian pound and the closure of a manufacturing plant in Sudan. 

Over in the world of non-human health, animal genetics group Genus (GNS) has struggled with a combination of disease outbreaks and fluctuating demand for meat products. Pig prices tend to follow a boom and bust cycle in China – the world’s most important pork market – and are certainly at a low ebb at present. However, the potential FDA approval of Genus's gene-edited, disease-resistant pig, as far-fetched as the concept sounds, could yet turn things around.