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The pharmaceuticals sector used to be a happy hunting ground for investors looking for income stocks with share price growth potential too. AstraZeneca (LSE: AZN) and GSK (LSE: GSK) are two proud FTSE 100 names, but lately life has been somewhat challenging.
After a long run under transformative CEO Pascal Soriot, who turned AstraZeneca into the UK’s biggest company, a slowdown was inevitable as the valuation looked stretched. In contrast, GSK, under CEO Emma Walmsley, has struggled to keep investors onside as its drugs pipeline thinned and its dividend eroded.
Both stocks took a hit from threatened US tariffs on imported pharmaceuticals. Yet the last week has been fun, with AstraZeneca shares jumping 15% and GSK (which I hold) up 10%. And about time too.
AstraZeneca on the move
AstraZeneca’s underlying business remains strong. On 29 July, it reported a 26% rise in first-half pre-tax profits to $6.52bn. It delivered 12 positive Phase III readouts and 19 major approvals.
There are other issues at play and last Monday (29 September) one at least was cleared up, as Soriot announced plans to list directly on the New York Stock Exchange. AstraZeneca already trades there via US depositary receipts, but the new listing will deepen its access to capital markets. Happily, it will retain its UK base and FTSE 100 status.
The company also plans to invest $50bn in expanding its US operations. That’s a direct response to the tariff threat and shows how seriously it’s taking its American future.
Despite the recent 15% jump, the share price is up a modest 5.7% over 12 months. It still looks a little pricey, with a price-to-earnings ratio of 20.4. However, that also reflects investor confidence in its long-term growth story. The trailing yield has fallen to 1.95%.
GSK fights back
Despite last week’s jump, GSK’s shares are only up 11.5% over 12 months. Growth has been in short supply for years. The shares perked up after Walmsley’s departure was announced on 29 September, as investors hoped for a change of direction.
But Q2 results, published on 29 July, weren’t exactly disastrous, with operating profit up 33% to £2.02bn. Cash generation rose 47% to £2.43bn.
Legal wrangles over Zantac and vaccine setbacks have held GSK back, but management expects five major US approvals this year and 14 more product launches between 2025 and 2031. The group is also adapting to tariffs by expanding US manufacturing.
GSK shares look better value, with a P/E of 10.9. Although that also signals lower hopes for the future. The dividend yield of 3.75% is decent, though still a far cry from the 5% to 6% investors once took for granted.
Long-term potential
Yet I think GSK’s low valuation makes it worth considering today. My personal holding is finally stirring, and I suspect the real rewards will come over the longer term for patient investors who take the long-term approach.
There are always risks. Drug approvals are never risk-free. Class action lawsuits can spring up out of the blue and prove costly. Tariff threats add another layer of uncertainty.
AstraZeneca has the stronger record and the bolder strategy, but both firms show that big pharma still has life in it. This sector might be volatile in the short run, but over time, should deliver both income and growth.
