Over the long term, up to half of total returns from the stock market tend to come from reinvested dividends, and few blue-chip shares currently have a dividend yield as generous as that of GlaxoSmithKline (GSK). What's more, in a sector that has suffered from adverse patent competition, GSK's increasingly productive product pipeline, cost-cutting initiatives, and the potential for a boost to capital returns to shareholders following the sale of consumer brands, make the pharma giant once again look like a must-have core holding.
- Pipeline delivering the goods
- Returns look set to grow
- Starting to look more focused
- Cost-savings coming through
- China looks tricky
- Still has to deal with variable margins
Despite the recent setback of a failed trial for a highly experimental vaccine for melanoma skin cancer, GSK's product pipeline has delivered this year where it counts. For example, the faster than expected approval of chronic obstructive pulmonary disease (COPD) drug Breo Ellipta, also known as Relvar in the US, with a further approval expected soon from European regulators, underlined how flexible its product development has become. Breo Ellipta is of particular significance as it is the follow-up medicine to blockbuster drug Advair and reinforces the company's lead in inhaled respiratory medicines. Analysts had previously ascribed a 40 per cent chance that Breo Ellipta would be approved and the company can look forward to peak sales of about $1.6bn (£1bn) by 2018, according to estimates. In addition, approvals have come through this year for Tivicay for HIV and Taflinar for skin cancer.
In total, that means three of the five products that were up for regulatory scrutiny this year have been passed for prescription to patients - by any definition an excellent result. Other products that have decisions pending include Anoro, a COPD combination therapy, in December, while the Food and Drug Administration has asked for more time to consider the evidence for type II diabetes medicine Eperzan. A full house of approvals would be a significant catalyst to the current share price and certainly puts GSK in the top echelon of research-based pharma companies.
There is also an interesting shift going on away from lower-margin consumer products. The sale of iconic drinks brands Lucozade and Ribena has been agreed with Japanese drinks company Suntory for £1.35bn. The money will almost certainly come back to shareholders via the dividend and ongoing share buyback programme. Fizzy drinks always sat uneasily in GSK's product portfolio and their sale should help reduce the dilution of the company's profit margins when the much higher value pharmaceutical products are taken into account.
GLAXOSMITHKLINE (GSK) | ||||
---|---|---|---|---|
ORD PRICE: | 1,656p | MARKET VALUE: | £81.1bn | |
TOUCH: | 1,656-1,657p | 12M HIGH: | 1,816p | LOW: 1,314p |
DIVIDEND YIELD: | 5.0% | PE RATIO: | 15 | |
NET ASSET VALUE: | 131p* | NET DEBT: | 216% |
Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
---|---|---|---|---|
2010 | 28.4 | 3.16 | 31.8 | 65.0 |
2011 | 27.4 | 7.62 | 102 | 70.0 |
2012 | 26.4 | 6.60 | 90.2 | 74.0 |
2013** | 27.0 | 6.45 | 93.9 | 78.0 |
2014** | 27.6 | 7.36 | 109 | 82.0 |
% change | +2 | +14 | +16 | +5 |
Normal market size: 1,000 Matched bargain trading BETA: 0.51 *Includes intangible assets of £14.8bn, or 302p a share **Deutsche Bank forecasts |
Returns are also being improved as a result of a cost-saving plan that is forecast to deliver £2.8bn of annual savings by 2014. Surplus sites have been closed and the company's research facilities rationalised around its main therapeutic areas. There's also been a greater emphasis on partnerships with smaller companies in order to limit losses in the event of a drug failing. The end result is that cash profit margins are expected to grow over the next two years from the current 32 per cent to 35 per cent by 2015, according to Deutsche Bank analysts. In addition, after several years of stagnation, revenue growth should also return at a much faster rate than the rest of the industry, with 2 per cent growth forecast already this year and next. If expectations are fulfilled, that means GSK will have escaped the worst of the patent expiry problems that afflicted the likes of AstraZeneca.
The negative points centre on the company's troubles in China. GSK won't be the first large company to come a cropper in emerging markets, neither will it be the last, but it is worth putting the Chinese corruption probe into the actions of some country-based executives into context. Last year, for instance, sales to China added up to £759m out of a £26.4bn total. Given that emerging market sales are far less profitable than those in the US or Europe, the proportion of group profits generated in China is akin to a rounding mistake on the income statement. In addition, US regulators have set the criteria for the potential approval of a generic competitor to best-selling asthma drug, Advair. That could be a negative in the long term, but the bar looks set very high for a so-called biosimilar drug to be approved, which will deter most generics companies.