GlaxoSmithKline: A Healthy Long-Term View

03/20/2020 5:00 am EST


Gavin Graham

Chief Strategy Officer, INTEGRIS Pension Management Ltd

GlaxoSmithKline (GSK) is one of the ten largest pharmaceutical companies in the world; its particular strengths are in asthma/respiratory, HIV, and vaccines, observes Gavin Graham, contributing editor to Internet Wealth Builder.

It has the largest global over-the-counter (OTC) consumer healthcare division. The OTC segment was formed by a merger of its consumer business with that owned by Pfizer (PFE) last year.

The combined business is No.1 in the U.S. and No. 2 in China, the two largest OTC markets in the world. Glaxo owns 68% of the joint venture and intends to demerge it from its pharmaceutical business and list it separately in the next couple of years.

In common with many established pharmaceutical companies affected by patent expirations, Glaxo is selling at approximately the same price as five years ago, although it has risen 25% over the last two years. This gives it on a reasonable p/e ratio of 13-14 times and a dividend yield of 5%.

CEO Emma Walmsley, who took over the top job from the consumer side, has focused investment and R&D on fewer drugs and leveraging the research platform better, while carrying out the Pfizer merger.

She is looking to split the company into its two arms within two years, ensuring a higher rating for the pharmaceutical side. The company is forecasting a 1-4% decline in earnings per share and maintaining its dividend for 2020.

In February, it was announced that Glaxo was contributing its adjuvant platform for pandemic vaccines to the Coalition for Epidemic Preparedness for the fight against COVID-19. The report stated that by using only small amounts of the vaccine antigen, output of vaccine does can be increased, giving researchers a crucial edge in pandemic situations.

While Glaxo’s short-term outlook is relatively unexciting, the potential for its vaccine division to contribute to the fight against COVID-19 and the newly merged consumer healthcare unit should ensure growth in revenues and earnings over the next couple of years.

With the spin-off of the consumer unit, the remaining pure pharmaceutical business may enjoy a higher rating. Meanwhile, the 5% dividend provides support in a lower interest rate world. Buy.

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