41% Spike Possible On Glaxo's New Diabetes Drug

Jun. 6.12 | About: GlaxoSmithKline (GSK)

GlaxoSmithKline (NYSE:GSK) will present its new diabetes drug Albiglutide at the annual meeting of American Diabetes next month. It will present its data from 8 late stage studies known as Harmony 6 and 7. If the drug will be approved, it will compete with existing medicines from Amylin (AMLN) and Novo Nordisk (NYSE:NVO). It will also compete with other late stage experimental drugs from Sanofi (NYSE:SNY) and Eli Lilly (NYSE:LLY).

Albiglitude is an injectable medicine that belongs to the same class of GLP-1 therapies of Novo's Victoza and Byetta from Amylin Pharmaceuticals and Eli Lilly. It is an investigational biological form of human GLP and not currently approved anywhere in the world. The drug is a human protein that helps the body maintains blood sugar levels. At present, Victoza is the market leader in the GLP-1 space. However, there are several drugs that are on the pipelines including Lyxumia from Sanofi.

Based on the report of International Diabetes Federation, one in every 10 adults may have diabetes in 2030. This is equivalent to 552 million people, higher than the 366 million people with diabetes at present. This also assumes nothing is done to limit the epidemic. It also said that around 183 million people have diabetes but don't know it.

It seems that the drug from Glaxo is timely despite it being a late comer in the scene. It has the ability to partake in a huge and dynamic market. There are estimates that sales could reach $712 million in 2018. This appears big for a sole drug as it equates to 2% of the estimated sales of $44 billion this year.

The main selling point of the drug is that it has lower rates of nausea and other side effects, as well as smaller needle than its competing drug Bydureon.

Meanwhile, it launched a hostile takeover bid for its partner Human Genome Sciences (HGSI) for $2.6 billion. This goes to show that this diabetes drug has strong potential to Glaxo. This is contrary to reports that the expected sales for this drug would have lackluster performance and would not have significant impact on the company's profitability.

The Harmony 8 trial is expected to be completed within months. All other 5 studies will be finished early next year. There are no details yet and all of the results of the trial are confidential. The denial of Glaxo's drug is a welcome relief to competitors. Other pharmaceutical companies are also building their diabetes portfolio.

Glaxo is targeting to rebuild its diabetes business after the withdrawal from the European market of its Avandia drug in 2010. Sales were limited in the United States as there were cases of increased risk of heart attacks. There are reports that it has not yet proven whether the cases of heart attack are linked to the drug. Prior to the withdrawal, Avandia performed well with $3 billion in annual sales.

Ex-Albiglitude, Glaxo's long term prospects are good

The company has grown its revenues by 3.35% a year. This translates to earnings per share growth of 1.76%. The reason why the company has lower single digit growth is due to size. You can't expect a $22 billion company to double its size. It would take more than its current asset size to do that. Thus, investors should expect a modest growth rate in the coming years.

Analysts expect earnings per share of $3.94 this year. This suggests an increase of 19% over the same period last year. These forecasts do not account the revenues contribution of its Albiglitude drug. Even without the approval, the company will do well. Over the next 5 years, the company is expected to grow its earnings by 5% a year. This is in line with its peer industry growth of 5% to 6%.

Its margin will remain 26% to 28% of sales. It seems that most of its drug portfolio has higher patent life and expiration. This will serve the company well despite concerns of generic drug makers eating the market share.

Valuations

The stock is currently trading at 11.20 times earnings. The stock is trading at multi year lows of 11 times earnings. Over the last 5 years, it has a 40 times earnings multiple.

It has price earnings to growth (NYSE:PEG) ratio of 1.92 times. This is lower relative to the 4 to 5 times PEG ratio of its peer company.

It also has a dividend yield of 5%. This is higher than the industry's yield of 2.53%. Over the last 5 years, it has grown its dividends by 7% a year. It has also a high payout ratio of 80% of net income. This gives investors relatively good income in the long run.

In contrast, some of the major pharmaceutical companies are trading higher. For example, Pfizer trades at 20 times earnings and has a dividend yield of 1%. Sanofi trades at 13 times earnings and carries a dividend yield of 1.65%.

Shareholders, fasten your seatbelts

Investor should watch out for the timeline of this drug as it will have significant impact on the stock price. I believe that estimated annual sales of $700 million a year are conservative assumptions. It has similar economic prospects with its predecessor Avandia.

If that would be the case, the drug could fetch an operating margin of $1.2 billion a year. It could also translate to a multiple of 40 times. Thus, the drug could be worth $18 per share. On the other hand, the drug could have annual sales of $700 million. At that level of revenues, the drug alone is worth $6 per share.

With these assumptions, this suggests an upside of 13% to 41% from the current price levels of around $43.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.