GlaxoSmithKline: Don't Pass On This Long-Term Gem

| About: GlaxoSmithKline (GSK)

The recent acquisition of Human Genome Sciences, Inc. (HGSI), alongside the abundance of products in Phase III and regulatory review stages, exemplifies the success of GlaxoSmithKline's (NYSE:GSK) current transitional phase of reorganization. The recent earnings report underscores GlaxoSmithKline's strength as an organization, as it maintains its 2012 guidance and works towards achieving its long-term goals, while enduring headwinds in Europe and the U.S. In this article, I will explain why investors should buy GlaxoSmithKline before the stock price increases on its robust pipeline of products and streamlined operations focused on global prominence.

Compared to other top U.S. pharmaceutical companies like Johnson & Johnson (NYSE:JNJ), Pfizer (NYSE:PFE), Merck (NYSE:MRK) and Abbott Laboratories (NYSE:ABT), GlaxoSmithKline has the lowest price to earnings ratio. GlaxoSmithKline also has the highest dividend yield of around 4.89%; this is around 100 bps higher than the top four U.S pharmaceuticals with over $100 billion in market cap. Aside from Abbott, GlaxoSmithKline has the lowest price to sales ratio among these pharmas, but it has the lowest sales growth over the past five years as well. Also, it does have the highest operating margin and profit margin compared to these top-tier U.S pharmaceuticals. GlaxoSmithKline has a higher gross margin than all of these pharmas, excluding Pfizer.

GlaxoSmithKline's beta is around 0.63. This is higher than Johnson & Johnson and Abbott, while it's very close to Merck's beta of 0.64. GlaxoSmithKline also has the lowest PEG ratio in comparison to the top four U.S. based pharmas. GlaxoSmithKline's current ratio is around 1.1, while its quick ratio is close to 0.86; this is lower than both Johnson & Johnson and Merck. GlaxoSmithKline also has a higher debt to equity ratio and higher price to book ratio than the four top-tier U.S pharmas. GlaxoSmithKline's revenue has been hindered recently due to the exposure and extenuating headwinds it faces in the European market, as well as the headwinds and maturing portfolio it has faces in the U.S market.

Overall, revenue in the earnings report for GlaxoSmithKline was relatively flat in the second quarter. Overall, revenue was around $10.2 billion, this declined by 2% year-over-year (YOY), while operating profit was over $2.7 billion. For 1H12, total sales were flat and equated to around $20.7 billion, while operating profit was over $5.9 billion. GlaxoSmithKline's Pharmaceuticals and Vaccines sales in Europe and the U.S declined by 8% and 6%, respectively, while the Emerging Markets Asian Pacific (EMAP) division and Japan increased by 9% and 6%, respectively. Consumer healthcare sales in the second quarter increased by 7% as well, and GlaxoSmithKline expects overall revenue for 2012 to be in line with revenue from 2011. Consumer Healthcare for 1H12 increased by 1% and offset the decline in Pharmaceuticals and Vaccines. In the second quarter, markets outside of the U.S and Europe accounted for 41% and increased by 7%. In 1H12, markets outside of the U.S and Europe accounted for 40% and increased by 5%. New product sales from oncology had strong growth and increased by 29% in 1H12.

GlaxoSmithKline's Pharmaceuticals and Vaccines sales generated over $8.2 billion in the second quarter and over $16.6 billion in 1H12. During the second quarter, GlaxoSmithKline's respiratory division generated over $2.8 billion in revenue and over $5.7 billion in revenue during 1H12. Within respiratory, the Seretide/Advair product generated over $2 billion in the second quarter and over $3.9 billion in 1H12. The vaccines division generated over $1.2 billion in the second quarter and over $2.4 billion in 1H12. GlaxoSmithKline's HIV division generated over $540 million in the second quarter and over $1 billion in 1H12. Consumer Healthcare generated over $1.9 billion in the second quarter, over $750 million was in Total Wellness, and over $900 million came from markets excluding the U.S and Europe. In 1H12, Consumer Healthcare generated over $4 billion, with over $1.6 billion from Total Wellness, and over $1.9 billion from markets excluding the U.S and Europe.

Despite the headwinds from struggling European economies and a maturing portfolio in the U.S., GlaxoSmithKline's CEO highlighted many reasons to have a promising outlook on the company's long-term projections. Aside from the growth in Japan, EMAP and the consumer division, the CEO spoke about the success of the HIV, diabetes and respiratory products throughout the quarter. More importantly, he spoke about the growing potential in the current pipeline. GlaxoSmithKline has data on 12 of the 15 products it initially projected, and 10 of the products have lead to positive data feedback; eight filings for new drug approvals are expected throughout the next 12 months or so. GlaxoSmithKline currently has more products in the pipeline than it has had in the past 10 years.

GlaxoSmithKline is currently being reorganized in order to receive regulatory approval on a global scale at a faster and more efficient rate. GlaxoSmithKline is currently the fastest growing drug firm among the top 15 in Japan. Acquiring Human Genome, recent filings in the U.S and Europe for two melanoma treatments and the success of the oncology drug, Votrient in the U.S since April in conjunction with recent approval by the European Commission underscores GlaxoSmithKline's current success in its transition phase. Votrient currently has 18% market share for patients with advanced renal cell carcinoma. GlaxoSmithKline expects the Human Genome acquisition to contribute to earnings in 2013 and will give GlaxoSmithKline full ownership of the lupus drug, Benlysta, as well as albiglutide and darapladib.

The current organizational restructuring underway, emphasizing focus on core functions of pharmaceutical development while improving its compliance and marketing operations, are good reasons to invest in GlaxoSmithKline for the long term. I think GlaxoSmithKline will experience substantial long-term organic growth by improving its operations to achieve regulatory approval and becoming more efficient in getting effective products through the pipeline in a timely manner.

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