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Summary

  • The Chinese issues have caused the stock price to fall and we believe this fall has created a buying opportunity.
  • Sales growth for Promacta remains strong and the addition of another indication will allow the company to further grow its sales.
  • GSK's joint venture with Pfizer has received approval for its HIV drug and it will result in considerable sales growth for the company.

The major players in the healthcare sector have been suffering despite an overall impressive performance of the sector - most of the BioPharma companies have outperformed the broader index as well as the healthcare sector. However, GlaxoSmithKline (NYSE:GSK) has been suffering due to some issues in China and poor performance during the first half of the year. The stock has lost over 13% during the last six months.

We believe the fall is temporary and the long-term growth prospects of the company are intact. The stock price has started to climb up again due to recent FDA drug approvals. Moreover, GSK's deal with Novartis (NYSE:NVS) has improved the cash position of the company, which could be directed towards the shareholders over the next few quarters. However, this article focuses on company's short-medium term plans to stabilize its revenues and we have also tried to highlight the core growth areas for the company.

What's next for GSK?

The company has been suffering due to some issues in China. The Chinese government has accused the company of corruption, claiming that the company officials have bribed the doctors and health officials in China in order to manipulate the drugs market. These allegations have caused substantial financial loss to the company - as sales have declined approximately 18% in the region during the last year. The company conducted internal investigation to tackle the issue - this was a major development for GSK as the Chinese market is huge and it is one of the most important regions for the company.

GSK is increasing its global reach in the emerging markets and anticipates strong growth from these regions - Emerging markets and Asia Pacific region, excluding China, reported the largest sales growth [around 10%] in the last year. Moreover, the emerging markets continue to report increased turnover during the second quarter of the current year, which shows that the growth is likely to remain strong in the short-medium term from this region.

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Source: Second Quarter Earnings Announcement.

Strong Product Pipeline

GSK recently announced that the company received approval for an additional indication of its signature drug, Promacta. The FDA approved the drug for the treatment of severe aplastic anemia [SAA] in patients who did not respond to Immunosuppressive therapy [IST]. SSA is a disease in which the bone marrow does not make enough blood cells, including red blood cells, white blood cells and platelets. GSK's Promacta has a compound called Thrombopoietin, which combines with a receptor on blood cells to produce physiological reaction that increases the production of these blood cells.

The new indication approval from FDA will offer significant growth prospects to the oncology segment. The oncology segment reported sales increase of over 39% during the second quarter -- Promacta sales grew by 36% during the period. Moreover, the market size of SAA patients is increasing and approximately 600-900 cases are diagnosed annually in the U.S. for this rare and fatal disease. The Promacta sales will further increase by the addition of this new disease indication.

GSK also has a joint venture with Pfizer (NYSE:PFE) and Shionogi - ViiV Healthcare Limited (ViiV) - GSK owns 77% interest in this venture while Pfizer owns 13%, the remaining 10% is owned by Shionogi. ViiV Healthcare is a small biotech company which focuses on the chronic HIV disease.

Recently, ViiV Healthcare received approval for its new drug, Triumeq, which is a combination drug aimed to treat HIV patients. The new drug reportedly combines three drugs: Dolutegravir, Abacavir and Lamivudine and is aimed to cure HIV-1. There were over 1.1 million HIV infected patients in the U.S. at the end of the last year - and the rate of increase in the patient population has been stable at around 50,000 per year. This a substantial market for the company and GSK being the majority shareholder, will benefit considerably. We believe ViiV will contribute towards the revenue growth over the next few years and it will be a profitable venture for the company.

Conclusion

The Chinese issues have pushed the GSK stock down, which creates a good buying opportunity in our opinion as the growth prospects of the company still remain strong. GSK has a strong pipeline and the company should be able to enhance its earnings through these new drugs. The focus on the emerging markets is important as the disposable income is growing in these regions and the spending on healthcare is also going up.

The current valuation of the stock is also attractive due to the recent fall in the stock price - at the moment, P/E ratio for GSK is 15.2, compared to the industry average of 22.2. Furthermore, the price-to-sales ratio of the company [2.9] is also below the industry average of 3.8. The most important factor we believe is the growth in net income over the last three years - over the last three years, average annual growth in net income has been over 49% for the company, compared to the industry average of just 11.9 - growth in net income along with the growth prospects mentioned above make GSK an attractive investment, in our opinion.

Additional Disclosure: This article is for educational purposes only and it should not be taken as an investment recommendation. Investing in stock markets involves a number of risks and readers/investors are encouraged to do their own due diligence and familiarize themselves with the risks involved.

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Source: Is GlaxoSmithKline A Solid Long-Term Investment?