Why GlaxoSmithKline Is A Tempting Buy

Aug.14.14 | About: GlaxoSmithKline (GSK)

Summary

GlaxoSmithKline's stock is falling fast because of declining sales and bribery accusations.

It's now vulnerable to a takeover attempt from a larger competitor like Pfizer.

In the meantime, Glaxo treats its investors to a high dividend yield.

By now, most investors know all the problems facing pharmaceutical giant GlaxoSmithKline (NYSE:GSK). It's being hit on all sides by everything ranging from falling sales of its key drug Advair due to generic competition, to accusations of bribery in markets including China, and several others.

Investors have reacted to all this as you'd expect. Shares of GlaxoSmithKline have lost 12% of their value since the beginning of the year, and are 17% off their 52-week high reached just a few months ago. The sell-off has been fast and furious.

At the same time, though, the extreme bearishness may be overdone. GlaxoSmithKline has a diverse, highly profitable business, and thanks to its sell-off, the stock is now fairly cheap. In addition, GlaxoSmithKline offers a great dividend yield that places it ahead of most of its peers among Big Pharma. Last but not least, now that its stock price has declined, it might be vulnerable to a takeover attempt by a larger peer such as Pfizer (NYSE:PFE).

If you're not afraid to buy when there's blood in the streets, GlaxoSmithKline could be a savvy pick.

Pharmaceutical pipeline intact

GlaxoSmithKline's earnings so far this year have been significantly impacted by the threat of generics. Indeed, sales of the company's flagship product, inhaler drug Advair, have declined significantly. Fortunately, Glaxo isn't sitting still in the inhaler category. It's busily rebuilding its respiratory portfolio with a trio of launches, including Breo in the United States, as well as Anoro and Incruse.

Moreover, Glaxo has a robust pipeline in some exciting new areas of therapy, such as HIV and ebola, and has a robust vaccines business in general. For example, its HIV sales rose 13% last quarter, thanks to the recent launch of integrase inhibitor, Tivicay. In addition, Glaxo produced 26% growth in sales of vaccines in the emerging markets last quarter.

In all, Glaxo holds 40 new molecular entities in either Phase 2 or 3 clinical development. Plus, Glaxo believes around 30 of its assets currently in research and development have the potential to take leadership positions in their respective markets.

It's true that Glaxo's results so far this year are unimpressive. Sales and earnings per share over the first half are down 12% and 22%, respectively, in pounds. That being said, GlaxoSmithKline doesn't expect earnings to decline for the full year. That hardly seems reason for such a decline in stock price.

In the meantime, Glaxo offers its investors a cheap valuation and high dividend yield until it sorts through its various challenges. Shares of Glaxo trade for just 13 times trailing earnings and offer a 5.5% dividend yield.

Speaking of Glaxo being cheap, now would be a perfect time for a larger competitor to swoop in and launch a takeover attempt.

Takeover target in the making?

A hidden catalyst may be in the form of a takeover. GlaxoSmithKline's drop in such a short time and its well-publicized operating challenges make it vulnerable to a takeover campaign. And who better to launch such an initiative than Pfizer?

Fresh off the disappointment from seeing its repeated attempts to acquire AstraZeneca (NYSE:AZN) fail, Pfizer should turn its attention to GlaxoSmithKline. Pfizer's goal in buying out AstraZeneca was to boost its pharmaceutical pipeline now that it has lost Lipitor to patent expiration. Pfizer can get the same benefits from buying Glaxo that it could from acquiring AstraZeneca.

The bottom line is that Pfizer is seeing sales decline significantly now that Lipitor is off-patent. Lipitor was the best-selling drug ever, and Pfizer will most likely turn to an acquisition to quickly replace those lost sales. Now that AstraZeneca is off the table, Glaxo looks like an attractive target because of its newfound vulnerability.

A cheap valuation, high dividend yield, and attractiveness as a takeover target all make GlaxoSmithKline a compelling investment at its current price of $47 per share.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.