by Larry Gellar
After failing to reach a buyout deal with Human Genome Sciences (HGSI), GlaxoSmithKline (GSK) will now make a cash tender offer to the company's shareholders for $13 per share. Considering Human Genome Sciences' top ten shareholders own 78% of the company and the fact that Human Genome Sciences' shares are trading for over $14 at the time of this writing, this offer could take quite some time to materialize. Still, it's worth a try for GlaxoSmithKline, and the benefits of a Human Genome Sciences takeover are substantial. The two companies are partners for the Benlysta drug as well as two other drugs that are in late-stage trials. By buying Human Genome Sciences outright, GlaxoSmithKline would have complete control of these drugs. GlaxoSmithKline will probably have to raise its price to get the necessary majority of shares needed to complete the tender offer, but I still think Human Genome Sciences would make for a great addition to the drug giant.
With or without Human Genome Sciences, GlaxoSmithKline looks like a pretty attractive stock right now. The stock's price to earnings ratio is 14.13, which is lower than that for similar companies such as Pfizer (PFE) (21.51), Novartis (NVS) (14.99), and Roche Holding (RHHBY.PK) (14.31). GlaxoSmithKline's price to book (8.87) and price to sales (2.60) ratios are admittedly somewhat high, but I would consider these measures to be less reliable than the price to earnings ratio. Furthermore, GlaxoSmithKline's margins are fairly strong, which is another good sign - those numbers are 19.93% net profit, 73.49% gross, 33.62% EBITD, and 28.50% operating. In my opinion, this can be taken as a sign that GlaxoSmithKline will be able to grow profitably in the future.
GlaxoSmithKline also stands to benefit from an important approval from the U.S. Food and Drug Administration. Patients with advanced soft tissue sarcoma who have received chemotherapy in the past can now use a drug called Votrient. Votrient was not approved for use in patients with adipocytic STS or gastrointestinal stromal tumors, but Votrient should still be an important drug for GlaxoSmithKline going forward. In fact, Votrient is also big for GlaxoSmithKline because it represents a successful partnership with the European Organization for Research and Treatment of Cancer. Indeed, this type of work should lead to even more breakthroughs in the near future.
Meanwhile, I would be remiss not to mention GlaxoSmithKline's latest earnings report, which was somewhat disappointing. At this point, the earnings report has already been priced into the stock, but it's still worth discussing. Net profit for the first quarter dropped by 13%, although this was in part due to high earnings from a year ago caused by a couple of asset sales. (Specifically, GlaxoSmithKline sold Quest, the U.S. lab operator, and its North American stake of Zovirax cold sore cream). Revenue did increase by 1%, though, which is particularly encouraging because of GlaxoSmithKline's exposure to Europe. In addition, GlaxoSmithKline's management seemed optimistic about 2012.
GlaxoSmithKline's responses during the earnings release's Q&A session are one place where the optimism is apparent. For instance, GlaxoSmithKline's management that emerging markets should stay strong despite problems in the Middle East because of the company's strength in Latin America and China. Sales in those latter two regions are up 11% and 27%, respectively. GlaxoSmithKline has also taken into account the possibility of unrest in the Middle East for its growth calculations. Another interesting factor that's been affecting GlaxoSmithKline has been the relative lack of infectious disease consultations, but GlaxoSmithKline noted that this may be an anomaly that could see improvement in the future.
GlaxoSmithKline also discussed its long-acting muscarinic antagonist treatment at the Q&A session. Specifically, the company believes it will be able to come out with a once-a-day treatment soon, which would be a critical improvement over the current twice-a-day treatment. CEO Andrew Witty had this to say: "We've done an extensive Phase IIb program, Tim. We've done 3 Phase IIb studies, which have all come out where you'd hope them to be." In fact, Mr. Witty even briefly mentioned some Phase III data he's seen. Ideally, these studies will lead to a breakthrough in the area of chronic obstructive pulmonary disease and similar ailments.
Another important development for GlaxoSmithKline has been the sale of its non-core over-the-counter international brands. Specifically, Aspen Pharmacare Holdings Limited will buy these assets for 164 million pounds. This is actually part of GlaxoSmithKline's bigger plan announced in February of selling all of its non-core Consumer Healthcare OTC businesses, and it's a move that should help the company maintain its focus. The deal with Aspen covers Phillips MOM, Zantac, Dequadin, Cartia, and Solpadeine, and other deals have been made with Prestige Brands Holdings (PBH) and Omega Pharma. In fact, the deals with the latter two companies include brands such as Goody's, BC, Ecotrin, Fiber Choice, Tagamet, Lactacyd, Abtei, Zantac, Solpadeine, Nytol, and Beconase. GlaxoSmithKline also hopes to sell global rights for alli, but a supply disturbance has put that on hold. Still, this wide-sweeping strategy of divestment should add value for shareholders eventually.
With a dividend yield of 4.8%, GlaxoSmithKline is a particularly attractive stock for investors looking for additional income. Furthermore, based on what I'm seeing on the statement of cash flows, GlaxoSmithKline is in a very strong position right now financially. Operating cash inflow for the first quarter was $1.012 billion pounds, and most of the cash outflows were used for dividends and stock repurchase. Through wise acquisitions as well as organic growth, GlaxoSmithKline should be able to deliver value to shareholders going forward. I think this stock can be safely bought now, although some investors may wish to see how much GlaxoSmithKline ends up paying for Human Genome Sciences. Even without Human Genome Sciences, GlaxoSmithKline has a strong pipeline coming up, led by drugs such as Votrient.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
