Glaxo leads the following four major therapeutic areas: anti-infectives, central nervous system, respiratory and gastro-intestinal/metabolic. The company has a leading position in the pharmaceutical industry.
Its resources have created several opportunities for new blockbuster drugs.
Positives and Risks
Diversified Base Should Support Growth: The company has a diversified base and presence in different geographical areas which should help support revenue growth. Glaxo’s acquisition of ID Biomedical in 2005 has made the company a major global force in both the injectable and the nasally-administered flu shot market. In addition, the vaccine business is expected to be a strong driver of growth in the near future. Expansion in markets like Japan, India and China should provide new opportunities for growth. The company has significantly increased its presence in emerging markets by acquiring product portfolios. Sales from such markets grew 22% in 2010. Glaxo expects to launch 42 products in Japan over the next four years.
Strong Consumer Health Business: Glaxo possesses one of the world’s largest Consumer Health divisions. Sales in this segment were £5 billion in 2010. This is approximately 17.6% of the total top-line at Glaxo. About 49% of this business is OTC medicines.
In the fourth quarter, Glaxo will be focusing on priority brands and emerging markets. It will primarily target three categories: Oral Health, Wellness/OTC and Nutrition. OTC plays a very important role. In the U.S., OTC sales are only about 7% to 10% of the drug market. A similar rate has been achieved in Europe. However, in China, the prescription market makes up only about 60% of the market with OTC accounting for 40% of the combined market. Glaxo wants to participate in China and OTC is the quickest and easiest way.
Another factor that should contribute to the growth of the Consumer Health segment is that Glaxo can leverage its OTC distribution by offering Rx-to-OTC products.
Cost-Cutting Initiative The company achieved £1 billion in cost savings in 2009. The cost cutting program is expected to deliver annual pre-tax savings of approximately £2.5 billion by 2012. This program will help earnings grow faster than revenues.
Strong Pipeline: Glaxo possesses one of the stronger late-stage pipelines in large-cap pharma. The main focus areas include dermatology and vaccines, neuro and immuno-inflammation, infectious diseases, cardiovascular and metabolic diseases, oncology, ophthalmology and respiratory.
The company intends to turn to carry out research activities in higher growth areas like neurodegenerative and neuro-inflammatory diseases like Alzheimer disease, multiple sclerosis and Parkinson disease.
The company is working on growing its biopharmaceutical pipeline through in-house discovery, the acquisition of Domantis and by in-licensing late-stage products. Glaxo has several clinical research programs underway.
The consumer and vaccine segments complete Glaxo’s growth opportunities. The former should trigger strong returns and increase the pricing power as few competitors remain in the market.
Like all pharmaceutical companies, Glaxo faces risks of drug delays or non-approvals from regulatory agencies, an increasingly aggressive generic industry, and competition in the pharmaceutical industry.
Last quarter results
Total sales increased 3% with the offset of weak sales in key respiratory drug Avair, diabetes drug Avandia and several antiviral ones and the strong sales from HPV vaccine Cervarix in Japan and recently launched drugs.
On the bottom line, EPS increased 1% y/y as higher costs weighed on earnings growth. Glaxo generates about 6 billion in GDP in operating cash flow annually and it is in a solid financial ground.
“…This has been another very positive quarter for GSK, and I'm very happy that we continue to deliver on the track that we set out 3.5 years ago as the various changes in our investment strategy have continued to yield the results we anticipated, and deliver a more diversified source of growth for the group going forward,” said Andrew Witty, CEO.
The fair value estimate is $49 per share based on an improved outlook for recently launched products as well as a lower expectation for generic Advair competition in the near term.
Average annual sales are expected to grow 2% during the next 10 years, with new products offsetting patent losses. Nevertheless, operating margins are expected to suffer a slight decline over the period with the company’s expansion in lower margin geographies and product lines. A 9.5% cost of equity, in line with the peer group is forecasted too.
Several products in the Pharmaceutical segment are facing competition. However, the Consumer segment is doing well and should help to boost growth. Furthermore, the company’s base and presence in different areas across the country should trigger revenue increases.
Glaxo’s current trailing 12-month earnings multiple is 18.0, compared to the 12.5 average for the industry. The stock is currently trading at 11.3x its 2012 EPADS estimate. A $47 price would be based on 11.9x its 2012 EPADS estimate.
“We continue to increase the returns we give to our shareholders. Today, we have announced another 6% increase to the dividend to 0.17p per share, and we have increased our expectation for our 2011 share buyback program by GBP 300 million to GBP 2.3 billion pounds. Year-to-date, we have spent GBP 1.8 billion on share repurchases and in total have returned GBP 4.4 billion to our shareholders,” added Mr. Witty.
Management & Stewardship
Glaxo selected Andrew Witty, the president of its European pharmaceutical business, to succeed Jean-Pierre Garnier as CEO in May 2008. Witty put into practice a cost conscious strategy and has leaded increasing sales in Europe. This should be beneficial in the United States. Furthermore, Witty has a wide experience overseeing operations in Asia. This is a sign of the company’s expansion. As regards Witty’s team, Chairman Christopher Gent brings an independent voice to the board.