It’s four years now since the UK went into its first coronavirus-inspired lockdown. At the time AstraZeneca LON:AZN and Pfizer NYSE:PFE were considered the leaders in the development of a vaccine for COVID. Pfizer was winning the race.
AstraZeneca produced a drug that was cost-effective and simple to distribute. Pfizer’s was expensive and needed sub-zero temperatures from ‘lab to jab.’ Meanwhile, GlaxoSmithKline’s LON:GSK vaccine efforts went down a pharmaceutical rabbit hole, producing little but disappointing trial outcomes until it was too late to really matter.
Many of the big pharmaceutical players were able to book substantial revenues from selling vaccines. However, the margins on those revenues could be low and they soon subsided.
Globally, Healthcare stocks performed far better than the wider market when the pandemic first broke, but before too long this performance had been given back as it became clear this was no golden ticket for the drug makers.
Here’s how the UK’s two largest drug companies have fared in the four years since.
AstraZeneca – beating Covid, cancer and rare diseases
Within a year of the first successful trials of any vaccine candidate, AstraZeneca had delivered two billion doses of their own vaccine to governments around the world. Reports of side effects hindered the commercial success of the project but AstraZeneca promised to deliver the drug at cost during the pandemic, so this was more a reputational issue than a profit and loss problem.
Away from Covid, AstraZeneca was developing its Oncology portfolio at pace. It had fought off a takeover bid from Pfizer six years before, arguing that the potential of its pipeline of anti-cancer treatments meant Pfizer’s offer far undervalued the business. Since then, AstraZeneca has brought new drugs to market that offer clinical advances in the treatment of breast, lung and gastric cancers. Analysts are forecasting that these new treatments will be delivering tens of billions of dollars a year in new revenues by the end of the decade.
The group has also diversified, constantly acquiring smaller biotech businesses that can give them access to promising compounds that are progressing through the research and clinical trials process. Just recently the group announced a $1bn deal to acquire Amolyt and it has spent almost $40bn buying rare disease specialists Alexion Pharmaceuticals.
“This combination of developing their own research pipeline and then buying and selling smaller companies or development candidates from their existing portfolio has been a particular feature at AstraZeneca,” said Steve Clayton, head of equity funds at Hargreaves Lansdown. “Managing their portfolio in this way helped the group to maintain and grow its dividend, until the cash flows from its major new cancer drugs had built up.”
On balance, AstraZeneca has been an extraordinary success story. It navigated through a period when older drugs were coming off-patent, supporting profits through M&A while creating one of the most significant new drug portfolios of any major drug company.
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GSK plc – fighting back into contention
While AstraZeneca has focused on building its Oncology portfolio, GSK plc, or GlaxoSmithKline as it used to be known, has been more focused on restructuring itself.
After a period of developing blockbuster drugs in the late eighties and nineties, the well dried up. Now GSK is refocused on developing new medicines and vaccines. Its shingles vaccine, Shingrix, is already a multi-billion dollars a year product, despite the pandemic interrupting existing vaccination programmes.
The arrival of activist investors, Elliott Advisers, a few years ago highlighted the weak returns GSK had achieved, despite some real clinical strengths within the business. The company is now more optimistic about its research pipeline delivering meaningful new drugs than for many years.
However, both GSK and its spun-out consumer division, Haleon, have been impacted by class action litigation around one of its early blockbuster drugs, Zantac. While Haleon argues it has no case to answer, GSK has been settling cases out of court, although it says the plaintiffs’ science is deeply flawed.
In any case, GSK’s business has more clarity about it these days and their current pipeline of 71 assets is predicted by GSK to contain at least 12 major new products to be launched from 2025 onwards.
What’s next?
Both stocks have paved their own ways since the pandemic. GSK has focused on transformation and renewal, AstraZeneca on maximising the potential of its Oncology and Cardiovascular portfolios, along with growing its rare diseases arm.
“Both have plenty of potential within their new product pipelines, but as always it is the execution of this potential that will drive investor returns,” said Clayton at Hargreaves Lansdown.
There is a risk that whatever they do, it may be insufficient to keep them in the market’s spotlight. In recent years, new classes of drugs, called GLP-1 and SGLT-2 inhibitors, have emerged. These seem to offer significant benefits in controlling diabetes and weight management, so clinical and commercial demand for them is red hot.
Novo Nordisk [FRA:NOVA] of Denmark and Pfizer NYSE:PFE are leading the charge currently. Novo’s weight loss drugs Ozempic and Wegovy are helping the company grow to become one of Europe’s most valuable.
Can the UK’s leading drug companies muscle in on these new markets?
“Developing a new drug from scratch can take a decade or more,” Clayton concluded. “We expect there will be a scramble by the big pharmaceuticals firms to acquire smaller rivals with promising GLP-1 candidates under development as they play catch up. With robust cash flows coming from their existing portfolios AstraZeneca and GSK have the firepower to get involved if they see the right opportunity. It’s been a long time since the pharmaceutical sector looked so interesting and the only certainty is that there will be changes ahead.”
