The mantra of expand and diversify seems to have gone rather out of fashion since the global financial crisis and recession. These days the rallying cry is: concentration and focus.
Just about everywhere you look, be it banks, miners or oil companies, you’ll have heard chief executives talking about selling “non-core” assets, and pulling out of this territory or that line of business.
It’s been happening in the pharmaceuticals industry, too. The top three FTSE 100 pharma groups — GlaxoSmithKline (LSE: GSK), AstraZeneca (LSE: AZN) and Shire (LSE: SHP) — have been as busy “de-complexifying” as anyone else.
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Glaxo has been in restructuring mode for what seems like forever. We’ve seen — among other things — the sale of its consumer drinks brands Lucozade and Ribena, the disposal of its oncology business, and the shifting of its consumer healthcare business into a joint venture.
Meanwhile, Astra’s recent divestment of a gastroenterology medicine is just the latest in a long line of actions designed to narrow down the company’s “strategic focus on selected therapy areas”, notably cancer, diabetes and respiratory medicines.
And Shire has been at it, too. Peripheral stuff — such as skin substitute Dermagraft — has gone, as part of the company’s “sharpened strategic focus” on core therapy areas in rare diseases and other specialty conditions.
As well as divesting non-core products and businesses, all three companies have been buying assets that complement and strengthen their chosen areas of focus.
Which pharma firm now offers investors the best prospects going forward? Well, all three companies have given guidance on their sales targets for some way ahead.
- Shire: 10% compound annual growth rate (CAGR) — not including M&A and in-licensing — to deliver sales of $10bn (£6.45bn at current exchange rates) by 2020.
- Astra: sales of $45bn by 2023 (the implied CAGR giving sales of $36bn — £23.2bn at current exchange rates — by 2020).
- Glaxo: “low-to-mid single digits” CAGR to 2020 (a 4.5% CAGR would get sales to £30bn by 2020).
If the three companies maintained their current price-to-sales ratings in 2020, the table below shows what would happen (based on current number of shares in issue).
| Market cap today | Market cap 2020 | Share price today | Share price 2020 | Increase in share price | |
| Shire | £33.1bn | £50.8bn | £56 | £86 | 54% |
| Astra | £54.3bn | £75.9bn | £43 | £60 | 40% |
| Glaxo | £65.7bn | £81.9bn | £13.5 | £17 | 26% |
Of course, in addition to my mooted increases in share prices, there are dividends to consider. Current yields vary widely: Shire at 0.3%, Astra at 4.2% and Glaxo at 5.9%.
I calculate that Shire could deliver a total of £1.25 in dividends through to 2020, bumping up its return to 56%, Astra £9.5 for a 62% return and Glaxo £4.25 for a return of 57%.
All sorts of things could happen in the next five years, of course, but the close grouping of the returns thrown up by my sums, suggests the market is pricing the three companies very similarly, taking into account management sales growth targets plus the dividend return.
If there’s not much to choose between the companies’ valuations, are they — as a group — good value, poor value or fair value?
Shire’s shares have made record highs this year, and trade above the valuation of £53 or so put upon the company by US group AbbVie a year ago. But things have moved on since then — notably with Shire’s $5.2bn acquisition of NPS Pharmaceuticals — and I believe Shire is worth considerable more today. The company released strong half-year results yesterday, and City analysts have 12-month price targets of £60+.
Meanwhile, Astra’s shares are currently 22% down from a rejected £55 offer made by Pfizer last year, and Glaxo’s shares are 18% down from their 52-week high.
As such, I reckon all three companies are very buyable at their current levels. Income seekers may find Glaxo particularly attractive with its high yield, Astra has strong growth & income credentials, while Shire has much to offer growth investors.
