GlaxoSmithKline's Sideways Dance May Pay Off in the Long Run

GlaxoSmithKline's decision to cut its pharma load is hurting them now, but will it turn out to be the better option long term?

Author's Avatar
Jul 22, 2016
Article's Main Image

The British pharma major created through the merger of Glaxo Wellcome and SmithKline Beecham in 2000 has been going through an “I got stuck” phase for the last 10 years. Overall revenues have been stuck in the GBP 23 billion to 28 billion range for the entire period, and if you are an investor who’s held the company’s stock during this time, then you will have been disappointed to see the stock now trading well below the peaks of 2006.

AkCLOAw4w4El_tckkV5BHFqcnzzHe5D_aJtQRcnoTMSrkRrnGKYqNnr7s3Nx63ttsaM3bLUVs3XO7cKOBfVz8X71INnITFmS1KbLHLD2TBVAVB4Fmlr56HnVG6G6vQwZvqcGlsKH

During the first quarter, GlaxoSmithKline (NYSE:GSK)'s pharma division brought in 3.58 billion British pounds, down 1%; vaccines grew 23% to reach 883 million; and consumer health care grew 26% to 1.76 billion. GlaxoSmithKline expects core earnings per share growth to be in the 10% to 12% range in 2016.

It’s the pharma division that has been going through many changes in the GlaxoSmithKline portfolio. In 2014 GlaxoSmithKline sold its oncology drugs to Novartis for $16 billion because it thought it didn't have the size and scale to keep pushing the last-generation products and wanted to keep its focus on the immuno-oncology segment.

Focusing on the immuno-oncology segment had its own advantages, as the it was projected to reach $14 billion in 2019 and $34 billion in 2024, but companies like Merck, Bristol-Meyers Squibb and Pfizer, too, stepping up the game, things are not going to be easy for GlaxoSmithKline to gain market share — and its pipeline still seems to be far away from tasting that success.

In its Q1-16 Earnings call, Andrew Witty, CEO of GlaxoSmithKline said:

“I'm also pleased with the progress we're making in our Oncology assets, with FDA breakthrough therapy designation awarded for NYESO in synovial sarcoma and positive data for our beta inhibitor. We now have 11 oncology assets currently in Phase I or II.”

OnYfCFvUFJ5tqOCMy4eF_Xcw--zeA6OOPr_dE9DNqCQFDDbfHgUPc4gvt08atQXmFexfGW4OlGqcYmJfrneJT95oO2D62bzuTTQgcYz0Bp60GD2zI9qVwFtMk8SSYUpAKAYnAnpb

With pharmaceuticals still accounting for the lion’s share of the revenue, GlaxoSmithKline’s overall performance will be invariably tied up to the performance of this division. GlaxoSmithKline expects its pharma unit to return to growth in 2016 with new product contributions offsetting the losses in Seretide, Advair and Avodart.

SmjnvmAnMscJiYPhHq2CF_H5z_MBzXLBMbxc4q3j0GVtObK_8Na0rKNOKtOKPQpI4Y1145XWwKTUF-GWfq9GdoSxKhl2QzPaV47Z5iiyB-2YXvfkgtZpyISIz5AUUL8XLyLDJ3Ih

The decline in the pharma business is yet to be arrested, however, and going by its CEO’s statements, it might have a good chance of doing that this year.

Glaxo wants to build a diversified company that does not have to rely on pipelines all the time. That was the reason it sold its oncology assets to Novartis and bought itsi vaccines business, and it was also why they went on to create a consumer healthcare division. It was a great idea, as things were indeed getting way too hot inside the pharma industry — something GlaxoSmithKline felt it couldn’t handle.

The transition is indeed a valuable one, and one that could serve GlaxoSmithKline well in the long run. The company could have opted to buy out a few drugs to compensate for its current product losses and fill the gaps in its pipeline but, unfortunately, the company decided to fight it out — and the result is what we are seeing now.

At the end of the most recent quarter Glaxo had 15.7 billion pounds in long term debt and 4.48 billion cash on hand, and with 2015 annual operating income at 10.3 billion, GlaxoSmithKline has the balance sheet strength to tide it out.

If you are willing to look at the really long-term picture, GlaxoSmithKline and the balanced focus of the company will pay off; but in the short term, I only expect the company to move sideways at best.

Disclosure: I have no position in any of the stocks mentioned, and no intention to initiate any position in the next 72 hours.

Start a free 7-day trial of Premium Membership to GuruFocus.