GlaxoSmithKline plc (ADR) (GSK) Gets the Much Needed Boost to Deliver Better Returns

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For a long time, GlaxoSmithKline, plc (ADR) (NYSE:GSK) stock has been termed as a laggard or on the long-term list of sick because of its poor performance compared to the sector index and other rivals. Now, conditions are changing for the better for the British drug maker. There were reasons for not performing on par with its rivals. One of the reasons cited for the lack of growth was that its results were badly impacted by the loss of patents. That apart, it faced pressures on pricing too. The double effect had its own impact on the company’s overall results to restrict sentiments. Now the recent action of the company has changed the landscape of the company and the recovery appears to be on the path.

Deal with Novartis AG Changes the Path

GlaxoSmithKline, plc (ADR) (NYSE:GSK) and the Swiss Company, Novartis AG (ADR) (NYSE:NVS), struck an agreement early this year that was considered as a landmark, as well as give and take one. It enabled the British firm to buy the Swiss firms’ vaccine business so as to integrate with its own unit. As a result, it has taken a stake of 63.5% in a joint venture that consisted of a consumer health-care business. In return, Novartis got the cancer drugs from Glaxo, which marketed the drug. The center-stage of the transaction in respect of the British firm was into three categories, i.e., pharmaceuticals, especially HIV therapies and respiratory, vaccines and consumer healthcare.

GlaxoSmithKline, plc (ADR) (NYSE:GSK) is an international leader in vaccines while its consumer health care included a portfolio of Flonase decongestant, Sensodyne toothpaste, and pain reliever Voltaren. Some analysts expect the company’s EPS to bottom out in the current year. That is because of the strong British pound, pricing pressures, investments in consumer health care and vaccines, which would impose pain on the numbers. However, sales might witness a 4% uptick next year. It is also reported that most analysts have lost their cool with the British drug maker because of its stock performance. Recently, the company has undone a decision to publicly offer its ViiV Healthcare stake to development HIV treatments. It had a JV with Pfizer Inc. (NYSE:PFE) for the same. The company also slashed its special dividend to 1 billion pounds sterling from 4 billion pounds sterling.

Conditions Set To Change For The Better

The conditions for GlaxoSmithKline, plc (ADR) (NYSE:GSK) are set to change for the better or even outperform in the coming years. That is because of the belief in the scope for vaccines enhancement, as well as consumer health as the company stands to gain from scaling up manufacturing, as well as sales. Its targets do not appear to be stiff too. Also, between the years 2016 and 2020, the company‘s objective is to deliver mid-to-single digit growth in vaccines. That is despite the meningitis vaccines launch, as well as the optimism on the possible shingles vaccine. That apart, the company is also aiming its consumer healthcare to achieve a mid-single-digit uptick.

Barclay’s analyst, Simon Mather, expects a rebound in outlook next year with its EPS estimated to be 84 pence a share. The brokerage also expects GlaxoSmithKline, plc (ADR) (NYSE:GSK) to deliver a compound earnings growth rate of a maximum of 9% growth between 2015 and 2020, compared to 6% for its peers. Mather said that nearly 85% of the growth targets to be achieved by savings alone. He said that the company might be able to save about three billion pounds sterling in the next several years and most of it will come before the year 2017 ends. The company appears to be conservative in having low-single-digit growth in its pharmaceutical unit

Advair Responsible For sales Last year

GlaxoSmithKline, plc (ADR) (NYSE:GSK)’s sales of 4.23 billion pounds sterling last year was benefited by a complex formula and an exceptional inhaler, which has delayed a competition to Advair. By next year, analysts are expecting a generic version of it to reach the market. However, currently there are manufacturers who have applied for regulatory approval. That is again a plus point for the UK firm. Also, Goldman Sachs Group Inc (NYSE:GS) analyst, Keyur Parekh, said that only one or two generic rivals to Advair can be expected in the near term. Therefore, he believes that the company could maintain 20 – 25% of the market in the Americas in 2020. That would mean sales of 881 million pound sterling, which will be triple that of the drug maker’s guidance.

Also, any drop in Advair can be managed by GlaxoSmithKline, plc (ADR) (NYSE:GSK) with its respiratory products, such as Breo and Anoro. There are doubts whether the current price of the share is reflecting the potential new products pipeline. The company would be removing any such misgiving during its presentation on November 3 about its R&D, which would be the first in ten years.

Valuation

GlaxoSmithKline, plc (ADR) (NYSE:GSK) has a market valuation of $102.55 billion or nearly 66 billion pounds sterling. Currently, the shares are trading at 16 times the projected earnings of 2016, compared with the multiples of 17 and 18 in respect of Novartis AG (ADR) (NYSE:NVS) and Abbott Laboratories (NYSE:ABT) respectively. Analysts preferred to have 2018 estimations so that it need not have to encounter possible long-lived assets of the consumer health care units, as well as the vaccines assets based on the estimated 2018 earnings.

Conclusion

Aberdeen Asset Management portfolio manager rightly said that once the investors start seeing the pipeline potential, there will be a re-rating opportunity for the shares. The slashing of a special dividend could allow GlaxoSmithKline, plc (ADR) (NYSE:GSK) to boost its dividend rate. Currently, the dividend provides a solid 6% dividend yield. The company appears to be placed well to deliver returns for the long-term.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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