It’s tough to be a British investor with a penchant for big pharma. Since Hikma (HIK) took a dive in 2016, there are just three drugs companies left in the FTSE 100 and none of them is giving much cause for celebration. GlaxoSmithKline (GSK) and Shire (SHP) have both underperformed the benchmark in the last 12 months, while AstraZeneca (AZN) has morphed into a high-risk biotech stock, with a worrying reliance on positive clinical trial data. No longer a comfortable haven, bolstered by revenue visibility, whopping margins and generous dividends, big pharma in the UK has become a risky sector which is testing investor patience.
First-quarter results from the largest of the trio – GSK – will have done little to ease concerns. Currency headwinds sent reported revenues down 2 per cent, while falling sales from the two top respiratory drugs stunted like-for-like revenue growth in the pharmaceutical division. Management may be singing the praises of new medicines Shingrix, Trelegy and Juluca, but these failed to make up for dwindling demand for older products.
Investors seeking reassurance should look to the balance sheet, which is in better shape than it was this time last year. In March, GSK bought Novartis’s minority stake in the companies' consumer healthcare joint venture, which removed an £8.6bn liability from the balance sheet and “a long-term uncertainty for the group's capital planning”, according to chief executive Emma Walmsley. This may be true, but the dividend is still not looking particularly solid. Free cash flow – to which the payout is linked – fell 50 per cent to £324m in the first quarter.