GlaxoSmithKline: A Pharma Favorite

09/01/2014 7:00 am EST

Focus: STOCKS

Richard Stavros

Analyst, Global Income Edge, Utility Forecaster and Personal Finance

Barring discovery of the Fountain of Youth, demand for healthcare is growing around the world as populations age in developed countries and as emerging countries want more of the drugs and medical equipment that the developing world makes, writes Richard Stavros, editor of Global Income Edge.

In our Conservative model portfolio, we recommend GlaxoSmithKline (GSK). Based in London, this is a global healthcare company that makes and sells pharmaceuticals and consumer healthcare products.

In both 2010 and 2012, GlaxoSmithKline ranked first among 20 global pharmaceutical companies on the Bill and Melinda Gates Foundation's Global Access to Medicines Index.

The firm's products can literally be found around the world. Its leading products include Advair/Seretide for asthma and COPD, products to combat HIV, and a range of vaccines.

GSK does R&D in immuno-inflammation, neuroscience, metabolic pathways, ophthalmology, respiratory, infectious disease, and biopharmaceuticals. Its consumer products include Aquafresh and Sensodyne toothpastes, Panadol pain reliever (sold in 85 countries, but in the US we know it as Tylenol), Nicorette, and Tums.

Its financial picture is strong. The dividend increased 6% in the first quarter of 2014 and the company predicted earnings per share growth of 4% to 8% in 2014.

The earnings report followed the April announcement of GSK's business swap with Novartis, a major restructuring that bodes well for GSK's future. The swap plays to GSK's strengths, which are its Vaccines and Consumer Healthcare businesses.

As part of the transaction, GSK will sell its oncology business to Novartis for $16 billion and buy the Novartis vaccines business for $7 billion.

The two companies will also combine their Consumer Healthcare businesses into a joint venture, in which GSK will have a 63.5% stake. The deal requires shareholder and regulatory approval but it should close in the first half of next year.

GSK's growth slowed in the second quarter versus the same period last year. Its core measure of earnings per share, which strips out currency moves and costs related to restructuring and acquisitions, fell 12%.

But we believe the firm's selling of older businesses through the swap will mean higher future earnings. And the firm has a healthy product pipeline, developing drugs that will treat malaria, diabetes, asthma, HIV, and myeloma.

The new JV's annual revenue makes it the second-largest Consumer Healthcare company in the world. GlaxoSmithKline pays a 5.6% dividend yield and is a buy up to $54 a share.

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