GlaxoSmithKline (Glaxo)
Based in the United Kingdom, Glaxo (GSK, Financial) operates in three fields: pharmaceuticals, where it has a leading HIV franchise; vaccines; and, over-the-counter consumer health. Glaxo’s pharma division is in the midst of a turnaround after having struggled with generic competition for its asthma drug Advair and an unproductive R&D pipeline. Meanwhile, the vaccines and consumer health segments have performed well and have generated healthy profit growth. What makes Glaxo so attractive to us is its compelling valuation. Based on our analysis, we think the current valuation ascribes little to no value to the core pharmaceuticals business.
Like Sanofi, management at Glaxo is actively repositioning the company to enhance its value. A new CEO, Emma Walmsley, was internally promoted in 2017 with the mandate to turn around the company. Hal Barron was brought in as the Chief Scientific Officer and President of R&D. His industry reputation and track record give us confidence he can lead a successful transformation into a specialty-focused pharma company by investing heavily in oncology and immunology. For the pharmaceuticals division, management targets annualized sales growth of at least 5% and annualized operating profit growth of at least 10% from 2021 to 2026. Management plans to spin off the consumer business in 2022 to highlight the value of the individual parts of the company. In addition, recent involvement from activist shareholders may increase the urgency to unlock value in other ways.
We believe Glaxo represents an asymmetric risk-reward opportunity. If the turnaround in the pharmaceuticals division is successful, the investment upside could be meaningful. But even if this does not pan out, the risk of a substantial loss of capital should be mitigated by the modest current valuation, which can be justified by the vaccines, consumer health, and HIV franchises. These types of opportunities are unique in today’s market, which is why we recently added to Glaxo (a 3.5% position on June 30).
From Dodge & Cox's Global Stock Fund second-quarter 2021 commentary.
