The stock is a favourite of income investors thanks to its healthy dividend – currently 5.5 per cent – but suffered a torrid year in 2013.
It was hit by a sell-off in emerging markets but also by allegations of bribery in China, which raised fears that the company could be blocked from one of the world’s fastest-growing drug markets.
FE Analytics data shows that the stock has lost 5.22 per cent over the past six months while the FTSE All Share has been flat and the MSCI Emerging Markets index lost 0.55 per cent.
Performance of stock vs indices over 6 months
Source: FE Analytics
However, this poor period has to be put in context: the company has gained 14.94 per cent over the last 12 months while the FTSE All Share has made 8.92 per cent and the MSCI Emerging Markets index has fallen 4.33 per cent.
Performance of stock vs indices over 1yr
Source: FE Analytics
Results out earlier this week have reaffirmed the long-term case for the stock in the bulls' eyes, suggesting it could be a decent long-term bet in your 2014 ISA.
Operating profit was up 27 per cent on a quarterly basis, although annual growth was down 4 per cent.
Particularly well-received was evidence of a turnaround in the company’s performance in China and the emerging markets.
Operating profit was up 6 per cent in the emerging markets and Asia Pacific regions – although this was put in the shade by a 27 per cent uptick in Japan.
However, the full-year numbers showed the dramatic effect of the bribery allegations in China on the company’s business.
Last summer Chinese police alleged that the company’s representatives bribed doctors and officials.
For the year, total turnover in pharmaceuticals and vaccines was up just 1 per cent, with the figure for China falling by 18 per cent. Stripping out this country, growth was 5 per cent.
Ketan Patel (pictured), senior socially responsible investment analyst at Ecclesiastical Investment Management, says that the company has made big efforts to stamp out the behaviour that caused it problems. “The situation in China is getting better,” he said. “Management has taken big steps to ensure the stuff that went wrong isn't repeated, and not only in China.”
Patel and Ecclesiastical take an “ethical” approach to investing, meaning that the allegations are particularly concerning to them. However, Patel says that he believes management to be sincere in attempting to get to the bottom of the problems.
The company was caught up in a scandal over compensation for its salesmen in the US in the past, and Patel notes that it was quick to change its methods of compensation to resolve the issue.
There is a broader concern about emerging markets exposure given the problems in this sector in recent years.
Patel points out that both Glaxo and Astra have been forced to look to these markets as Obamacare and fiscal austerity throttles spending in the developed world.
However, the strong sales growth displayed by Glaxo suggests that the troubles in those markets won’t be reflected in drug spending.
An issue more crucial to the stock’s fate over the last few years has been the so-called “patent cliff” and the company’s pipeline of new drugs.
Performance of stocks over 5yrs
Source: FE Analytics
Glaxo and AstraZeneca have both struggled over the past five years thanks largely to concerns that their most lucrative drugs were coming to the end of their patent-protected periods and other companies would be able to produce cheap generic copies.
Patel says that both companies are making some headway to surmount this problem, but Glaxo is further ahead, which is why he favours it.
“AstraZeneca is a pipeline story but Glaxo is a product story,” he said.
The analyst points out that Glaxo has had more new drugs approved in the US since 2009 than any other company.
AstraZeneca, on the other hand, is at an earlier stage and has fewer new products in the pipeline, making it more exposed to competition from generics.
This point is backed up by Daniel Mahony, manager of the Polar Capital Healthcare Opportunities fund.
AstraZeneca pumped more cash into development at a stage when it was in a weaker position, he explains, and how successful that spending will be remains to be seen.
However, Mahoney has a larger weighting to Astra than Glaxo in his fund on valuation grounds – having bought it at a much lower multiple.
At the current time Glaxo and Astra are both trading around the price/earnings [P/E] ratio of the market at 14.22 and 14.55 respectively – the FTSE 100 is on 13.13 times.
Both companies are now attractive as growth stocks rather than value plays, he says.
Patel admits that Astra has some strengths, and claims the new chief executive Pascal Soriot was a good choice and is doing the right things.
“There’s a pipeline emerging for the first time in years, which used to be huge,” he said. “They are talking about 19 new drugs in the end of 2014 and 2015, so it’s a pipeline story for the first time in a long time.”
However, the analyst notes that Soriot has told shareholders to expect 2017 to be a lot like 2013.
“That’s not a clarion call to buy the stock,” Patel notes.
The company is more of a work in progress and Ecclesiastical favours Glaxo, with Patel noting it has returned £59bn in cash to shareholders since 2001.
The number is put into context by Glaxo and Astra’s total market caps: £78bn and £48bn respectively.
Many top-rated managers such as Neil Woodford and Mark Barnett at Invesco rate the sector as a strong buy for long-term growth, as does Henderson’s John Bennett, as he explained to FE Trustnet earlier this week.
