Glaxo-Smith-Kline (GSK)
01/15/2008
Up to the challenge  With promising developments in the product pipeline and a new CEO looking to breathe fresh life into the company GlaxoSmithKline, in our opinion, offers considerable value for the long-term investor.
Despite having their star diabetes drug, Avandia, subjected to a series of studies questioning it's safety, strong growth across many of the company's other products went a long way to offset the drug's drag on earnings. Foremost amongst these, Glaxo achieved a robust 49 percent growth in vaccine sales over the period, to £593 million. A major factor behind this was increased demand for flu vaccines in the US. Moving forward, management intend to streamline the business towards growth areas such as vaccines and cancer treatments through job cuts in other areas. The restructuring will cost in the region of £1.5 billion, but generate annual cost savings of £700 million from 2010. Furthermore, management expect to generate immediate savings in the region of £350 million in the year ahead, providing some relief to lower Avandia sales and generic competition. Meanwhile, a strong product pipeline is essential to future growth for the big pharmas. And given Avandia's declining sales profile, this is particularly so for Glaxo. As a result, we were pleased to see management recently sign discovery-stage deals with two companies. Such deals are attractive because they allow Glaxo to cherry-pick from each company's pipeline, while avoiding much of the associated development risk. While the deals will not bear fruit for many years, they potentially deliver a higher return on development expenditure than would otherwise be the case. The companies involved are unlisted US company, Galapagos and European-based OncoMed Pharmaceuticals. Under the Galapagos deal, Glaxo has the right to choose up to six drugs designed to fight infectious diseases, while the OncoMed collaboration offers potentially four cancer treatments. In other news, the long search to replace retiring CEO Jean-Pierre Garnier ended with the announcement that company veteran Andrew Witty will take the top job in May this year. Mr Witty is currently president of European pharmaceuticals and we would expect his 22 years with the company to serve him well in the role. From a valuation perspective, Bloomberg consensus estimates are for a 2008 price to earnings ratio of less than 13 times, falling to below 12 in 2009. Meanwhile, the stock is expected to generate a healthy 2008 dividend yield in the region of 4.2 percent. In summary, we believe the company has the capacity to overcome the current challenges and deliver long-term value to shareholders. While this is not a short-term proposition, the stock's defensive nature and healthy dividend yield provide comfort in the meantime. 
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