There are relatively few drug companies that offer a truly balanced opportunity for investors. In many cases investors have to factor in the risk of significant near-term patent losses or uninspiring (or highly risky) pipelines. GlaxoSmithKline (GSK) is something of an exception in that regard. Although the near-term growth outlook is not blistering, Glaxo offers investors a good mix of capital appreciation potential, dividend income, and pipeline potential.
A Disappointing And Somewhat Confusing End To The Year
Due to a host of charges and items, Glaxo's fourth quarter results were messy and subject to a little more interpretation than usual. What was pretty clear, though, was that sales performance came up lacking. Revenue shrank about 2% in constant currency terms (below the expectation of 1% growth), with a sharp decline in vaccine sales the largest single culprit.
Sales of Advair were okay (though there was little growth), while smaller products like Avodart grew nicely. Glaxo had little to say about much-discussed Benlysta (which it sells under an agreement with Human Genome Sciences (HGSI), and HGSI had previously announced disappointing quarterly sales.
While Glaxo saw a little gross margin erosion, adjusted operating income was still up about 1% in comparison to last year. That was a couple of percentage points below the consensus estimate, though analysts adjust out those charges and items a little differently.
Can Glaxo Deliver Better News From Its Pipeline?
Glaxo has a relatively deep pipeline of 15 compounds that could add anywhere from 20% to about 40% in incremental sales in 2015 (relative to 2011) if things go well. Unfortunately, the trend recently hasn't been so encouraging.
Pivotal data on Relovair, a partnered drug from Theravance (THRX), is arguably good enough for approval in asthma and COPD, but the approval process may be a little longer than hoped due to some mixed performance numbers, especially in higher doses. Although Relovair is not better than Advair, the good news here is that nobody really expected it to be. What's more, the company has a deep pipeline in respiratory care and potential rivals like Novartis (NVS) and Forest Labs (FRX) have had challenges and disappointments of their own.
Diabetes drug development has been much less impressive. Otelixizumab is probably dead and the company's weekly GLP-1 drug Syncria hasn't been impressive. Data from the Harmony-7 study showed it inferior to both Amylin's (AMLN) Bydureon and Novo Nordisk's (NVO) Victoza. Curiously, the efficacy of Victoza was considerably lower than that reported in Amylin's Duration-6 marketing study (though the dosages were the same), which is arguably a big plus for Amylin. At this point, it looks like Syncria's biggest selling points are better side-effects and a more convenient administration (a pen with a smaller needle), but Amylin may be able to address the needle size issue before Syncria makes it to market.
Glaxo's cancer pipeline has had its ups and downs. Attempts to expand the use of Tykerb haven't gone so well, but other late stage compounds look more promising including a BRAF inhibitor for melanoma. Glaxo also has a high-risk/high-reward vaccine for melanoma and lung cancer that I feel is more likely to make it to market than Vical's (VICL) Allovectin-7.
Less Overall Risk
Relative to companies like Bristol-Myers Squibb (BMY), Lilly (LLY), and AstraZeneca (AZN), Glaxo has quite a bit more breathing room with respect to patent expirations. Although patents for Advair have started to roll off, would-be generic competitors Teva (TEVA) and Novartis have both commented on the difficulty of bringing a generic version to market in the U.S. This, then, could stretch out a few more years of blockbuster-level Advair sales and should limit patent cliff exposure to less than 25% between now and 2015.
Glaxo has also de-risked itself to some extent by completely its own large-scale restructurings. Although it sometimes feels as though restructurings are a perpetual feature of Big Pharma companies, Glaxo seems to have a pretty workable cost structure at present.
The Bottom Line
If there's a major risk to Glaxo, it may be in frittering away resources on risky pipeline projects and/or compounds that aren't likely to be major players in the end market. This is an issue that used to bedevil Sanofi (SNY) prior to a change in management and it bears watching as it pertains to programs in diabetes and Hep C at Glaxo. By the same token, it takes a healthy appetite for risk to hit on big opportunities.
Glaxo has a pretty benign level of patent exposure right now, and with a lot of Phase 3 data coming out in 2011 and 2012, investors will have a better sense of revenue prospects over the next few years. I believe this company can be one of the relatively rare consistent revenue growers (even if the growth is in the low- to mid-single-digits) and couple that with some margin improvement. All in all, fair value seems to lie north of $50 a share and the combination of capital appreciation potential and dividend yield make this a worthy stock to consider for a wide range of portfolios.