Which Is the Better Big Pharma?

This article has been adapted from our sister site across the pond, Fool UK.

It's been a good year so far for FTSE 100 pharmaceutical company AstraZeneca (NYSE: AZN) and its shareholders.

Keep taking the medicine
The Anglo-Swedish drugmaker -- formed in 1999 by the merger of ex-ICI business Zeneca and Swedish company Astra -- reported strong second-quarter results on Thursday.

For the quarter ended in June, sales reached $8.2 billion, up 3% on the same period of 2009. Although U.S. revenue declined 4% because of generic competition, non-U.S. revenue rose by 5%, boosted by a 16% increase from emerging markets.

Profit before tax climbed to $2.9 billion, up 12% year on year. Thanks to revenue growth and cost-cutting, earnings per share rose to $1.46, almost a quarter (24%) ahead of the $1.18 earned in the second quarter of 2009.

More good news came from a U.S. Food and Drug Administration advisory panel, which voted 7-1 to approve the launch of Brilinta. AstraZeneca's new drug to treat acute coronary syndrome could eventually produce sales of $1 billion a year.

In addition, AstraZeneca doubled its 2010 share buyback plan to $2 billion, while increasing the interim dividend to $0.70. Clearly, investors were chuffed with this set of figures and a 5% upgrade to forecast earnings for 2010. AstraZeneca shares rose 2.7% on Thursday, up 86.5 pence to 3,289 pence.

Strong results = strong shares
So far in 2010, shares in the U.K.'s second-biggest drug manufacturer have easily outperformed the wider market and those of its major rival GlaxoSmithKline (NYSE: GSK). Since the start of the year, AstraZeneca shares are up almost 12%, beating a 2% decline in the blue-chip FTSE 100 index and a 16% slide in Glaxo's share price.

A month ago, AstraZeneca shares jumped almost 10% in a single day when the company announced on June 30 that a U.S. court had rejected a patent challenge against best-selling drug Crestor, which brings in the thick end of $5 billion a year for the company. The ruling confirmed that AstraZeneca's patent for the cardiovascular blockbuster is valid until 2016, providing a six-year boost to future profits (unless later appeals succeed).

There may be trouble ahead
As you'd expect, AstraZeneca and its global rivals face similar threats in the years ahead.

Indeed, sales of Crestor could start to fall as early as next year, when Lipitor (Pfizer's cholesterol-lowering rival) goes off-patent. Likewise, ulcer treatment Nexium faces stiff competition from cheaper generic copies -- and this lost revenue will be difficult to replace.

With Big Pharma being hit by patents expiring, companies aim to move away from their long-standing reliance on "Western markets and white pills." Instead, drugmakers are looking to emerging markets and high-growth biotech tie-ups to generate future growth.

AstraZeneca vs. Glaxo
Here's how the two giants' fundamentals compare:

Dividend yields well in excess of market norms sometimes prove to be unsustainable and hint at future cuts to come. However, this isn't the case for big-pharma companies, where high and rising dividends are the norm for these utility-like cash cows, thanks to their 10%-plus free cash flow yields and low debt levels.

Lastly, without a major merger or acquisition, AstraZeneca's future profitability will largely depend on its ability to replace medicines approaching patent expirations with new drugs from its pipeline. In this respect, the company is behind its great rival Glaxo, which is why I prefer Glaxo for the long run.

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