GlaxoSmithKline - A Few Reasons Not To Buy In Now

| About: GlaxoSmithKline (GSK)

Current shareholders should continue to hold GlaxoSmithKline (NYSE:GSK) until at least the next earnings release; interested investors may consider other pharmas as more viable ROI opportunities for the near term. GlaxoSmithKline's success in the near term seemingly will rely predominately on partnerships, improving the public perception of the brand and expanding the applications for products in its current pipeline. GlaxoSmithKline is going to great lengths to improve its transparency both to the public and practitioners alike; the change in protocol could be the beginning of an industry trend. GlaxoSmithKline has also had positive clinical trials comparing the efficacy of its Votrient treatment to Pfizer's (NYSE:PFE) Sutent.

Pfizer, Sanofi (NYSE:SNY), Novartis (NYSE:NVS), and AstraZeneca (NYSE:AZN) are the major pharmas that are most comparable to GlaxoSmithKline. AstraZeneca is over 7 times earnings, GlaxoSmithKline's price is around 10.2 times earnings; all of the other three major pharmas have higher price-to-earnings ratios. GlaxoSmithKline's EPS is around $3.34; only Novartis and AstraZeneca have higher EPS rates for 2012. GlaxoSmithKline's 223.8% EPS growth in 2012, and its 8.78% projected growth in 2013 are the highest among these pharmas. GlaxoSmithKline's 3.3% sales growth through the past five years is the lowest among these firms. GlaxoSmithKline's current ratio is around 1.1 while its 2.4 debt-to-equity ratio is the highest among these firms.

GlaxoSmithKline's 66.2% ROE, 28.5% operating margin and 20% profit margin are some of the highest margins among these firms. GlaxoSmithKline's 0.13% float short and 1.6 short ratio are the lowest among these firms, exceeding only Sanofi's 0.12% float short and 1.2 short ratio. GlaxoSmithKline's beta score and average volume around 1.9 million are also among the lowest metric of the aforementioned firms. GlaxoSmithKline's stock is up 4.6% YTD and down 1.8% over the past month; Sanofi's 23.7% YTD increase and Pfizer's 3.5% increase in the past month are the highest growth rates among the firms. GlaxoSmithKline's annualized dividend is around $2.11, the stock has increased 3.6% since its last earnings release.

On GlaxoSmithKline's most recent earnings release, second quarter revenue totaled $8.3 billion, decreasing 2% as CER, YOY. Operating profit totaled $2.23 billion, decreasing 1% at CER, YOY. Sales in Europe declined 8% and sales in the US declined 6% due to regulatory and macroeconomic headwinds, increased generic competition, and discontinued brands. Pharmaceutical and Vaccines sales increased 9% in EMAP and 6% in Japan; Consumer Healthcare sales increased 7%, YOY. GlaxoSmithKline plans to launch 8 new products within the next 2 years, including treatments for COPD, diabetes type 2, and HIV. GlaxoSmithKline expects to gain momentum with imminent filings from its oncology franchise while the acquisition of Human Genome Sciences was projected to complete during the third quarter.

Ten of the fifteen assets expected to complete phase iii trials by 2013 have had positive data; only two have had negative data. Aside from bolstering its pipeline, GlaxoSmithKline remains focused on reducing costs and improving operating leverage. New improvements to GlaxoSmithKline's manufacturing process can add an additional $644 in savings annually before the start of 2016. The firm has already saved $3.2 billion annually throughout the last four years by implementing its operational excellence program. GlaxoSmithKline is also targeting a 25% core tax rate for 2013 after improving its rate to 25.5% in 2012. According to GlaxoSmithKline management, improving financial and operational efficiency while capitalizing on emerging markets are the main benchmarks for success.

In terms of progression free survival, Votrient has proved to be a non-inferior treatment compared to Pfizer's Sutent. Votrient's median progression free survival was only a month shorter while its objective response rate was more than 500 bps higher than Pfizer's Sutent. Votrient sales increased 77% in the second quarter and US sales increased 67% in the second quarter, primarily due to label expansion. Votrient proved to be superior in 11 out of 14 domains that gauge quality of life for the patients based on fatigue, mouth or throat soreness, and soreness in the hand and feet as well. If Votrient is accepted as a complimentary or superior treatment than Sutent, this could substantially increase GlaxoSmithKline's revenues from the renal cell carcinoma market.

GlaxoSmithKline recently made its second $4 million milestone payment to Epizyme according to the joint venture agreement in which GlaxoSmithKline handles the development and commercialization of epigenetic enzymes that Epizyme identifies as viable candidates. Success in developing personalized therapeutic treatments for patients suffering from cancer and genetic diseases may prove to be a significant source of revenue if clinical trials come to fruition.

GlaxoSmithKline also recently signed an agreement with Aeras to jointly develop an investigational tuberculosis vaccine. Collaborating with the largest nonprofit biotech that focuses on tuberculosis is a very promising venture for GlaxoSmithKline. Tuberculosis is the second deadliest infectious disease worldwide; around 1.5 million people die from it annually and there were over 8.5 million new cases in 2010. GlaxoSmithKline's M72/AS01E candidate has shown promise through preliminary clinical trials; phase iib trials are set to start in Kenya, South Africa, and India in 2013, upon retaliatory approval.

GlaxoSmithKline will be the first major pharma to provide case by case results for each patient from every clinical trial for the public and practitioners to access through its corporate website and public medical journals. GlaxoSmithKline claims it will provide transparency and detailed data for successful and discontinued trials to independent third parties as long as there is a valid scientific query. Ultimately, this shift in protocol may evolve into a distinguishing attribute from other major pharmas that can place GlaxoSmithKline's previous compliance and disclosure improprieties at the firm into obscurity.

GlaxoSmithKline has a very broad array of products in late state development, but it will not be until mid-2013, at the earliest, that ROI or reliability regarding the trials can be ascertained. GlaxoSmithKline faces significant competition from generic brands as well as major pharmas with significant market share and franchises exhibiting strong growth. Current shareholders should enjoy the high dividend and adhere to a long-term outlook; interested investors can find easily find a comparable asset with near term ROI and more reliability in the pharmaceutical sector.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.