GlaxoSmithKline: Beyond the Patent Cliff

02/22/2018 5:00 am EST

Focus: HEALTHCARE

John Eade

Chairman and CEO, Argus Research Group

GlaxoSmithKline (GSK), based in London, is a global healthcare company engaged in the discovery, development, manufacture and marketing of pharmaceutical and consumer healthcare products, notes John Eade, analyst with the leading independent research firm Argus Research.

While most companies in the Big Pharma group have moved beyond the patent cliff phase and are beginning to grow, Glaxo has lagged, as it faces pricing pressure and generic threats to its respiratory blockbuster Advair/Seretide. The drug will soon face generic competition, though generic manufacturer Mylan Inc. (MYL) has thus far been unable to bring a product to market.

Management has taken aggressive steps to leverage the company’s strengths, which include consumer products, vaccines and anti-infectives. Recent results are showing improvement, though generic competition poses a major threat to growth in 2018-2019. A new CEO has come on board and could accelerate the transformation.

The company posted its most recent results on February 7. For the fourth quarter, total revenue rose a pro forma 4%, in constant currency, to GBP 7.6 billion.  Along with the earnings release, management updated its guidance.

The guidance hinges on the timing of a potential launch of a generic competitor to Advair. If there is no launch in 2018, management expects Glaxo’s earnings to increase 4%-7%. If a  competing product is launched by midyear, then earnings are expected to be flat to down 3%.

In 2016-2020, management expects sales to grow at a low to mid-single-digit annual rate and EPS to grow at a mid- to high single-digit pace. Management anticipates that at least one version of generic Advair will be released during this period and that Glaxo will divest noncore businesses.

Meanwhile, Glaxo’s fastest-growing Pharmaceutical category is HIV.  Lead products in this business, which are sold through the ViiV Healthcare joint venture with Pfizer (PFE) and Japanese drug maker Shiongi, include the new Tivicay and Triumeq. Management is also targeting new vaccines for shingles and respiratory syncytial virus. It also expects strong sales of the Fluarix/FluLaval brands and of meningitis vaccines.

Turning to our EPS estimates, we are raising our 2018 earnings per ADR forecast to $2.82 from $2.75, as we expect a lower tax rate and solid sales growth to offset much of the risk of generic competition for Advair this year. Assuming a competitor reaches the market — which remains uncertain — we expect modest growth EPS growth in 2019 to $2.85.

Looking farther out, Glaxo’s long-term growth will be driven by its new product pipeline. Promising Glaxo products that are currently near the top of the pipeline or already in front of regulators include Nucala, for COPD; fostemsavir, for HIV-1 infection; the 2857916 BCMA antibody-drug conjugate, which has received breakthrough therapy status from the FDA for the treatment of multiple myeloma.

GSK shares appear attractively priced at current levels near $37.  From a fundamental standpoint, given the fluid nature of the company's earnings, we are less reliant on P/E analysis and more focused on price/sales and yield.

On price/sales, GSK ADRs are trading at a discount to the peer group; the yield of 5.9% is also well above the industry average. Given the company’s new growth pharma products and the promising outlook for the vaccines businesses, we believe that GSK merits valuation metrics more in line with industry averages. Our revised target price of $42 implies a yield of 5.1%.

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