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GalxoSmithKline: Cash Cow in Pharma
07/27/2016 8:00 am EST
Benjamin Shepherd reviews a recommended healthcare firm that has faced slow growth and patent expirations; here, the editor of Global Income Edge outlines his reasons for his continued optimism on the UK-based drug maker.
Many investors have had questions about the health of GlaxoSmithKline (GSK) over the past year, keeping the share price essentially flat. Glaxo is a cash cow with its better than 5% yield, so we’ve been concerned too, as it’s one of our best-paying holdings.
The biggest worry has been whether or not Glaxo would still be able to breathe easy as patents expire on its top-selling lung treatment Advair.
At the same time, generally tepid growth has left many investors wondering where the revenue would come from to replace Advair losses.
Sales growth averaged only about 1% annually over the past decade and earnings growth has come largely from cost cutting.
Those concerns seem to be abating; sales growth has also already shown solid improvement and management predicted earnings growth of 10% to 12% this year.
Over the longer haul management expects to capitalize on its robust pipeline to improve growth. It has said it expects to launch 11 new products by next year that should generate sales of about $7.9 billion annually (about 22% of last year’s sales).
One potential new product that leverages GlaxoSmithKline vaccine expertise is a novel inoculation for the Zika virus, though that doesn’t factor into the upcoming launch count.
It’s tough to guess when any Zika vaccine may hit the market since the development process typically takes a decade or more, even using a proven technology.
For those worried about investing in a UK-based company following the recent Brexit vote, Glaxo also seems to have that under control. First, only about 13% of its revenue comes from the UK.
Since most of its revenue is generated by vaccines and pharmaceuticals, I would expect demand to be steady regardless of how the UK’s separation from Europe shakes out. We rate GlaxSmithKline a buy under $54 a share.
By Benjamin Shepherd, Editor of Global Income Edge
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