GlaxoSmithKline: Buy For 4.5% Yield

| About: GlaxoSmithKline (GSK)
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GlaxoSmithKline (NYSE:GSK) reported relatively flat revenues for the second quarter of around $10.2 billion, which is a 2% decline on a year-on-year basis. Operating profit was over $2.7 billion. For the first six months of the fiscal year, sales at around $20.7 billion were also flat and the operating profit was around $5.9 billion. Pharmaceuticals and Vaccines sales in Europe and the U.S fell by 8% and 6%, respectively, while sales in the Emerging Markets Asian Pacific (EMAP) and Japan rose by 9% and 6%, respectively.

Consumer healthcare sales in the second quarter increased by 7%, and the company expects overall revenues in 2012 to reach the same level as 2011. In the second quarter, sales outside of the U.S and Europe accounted for 41% and rose by 7% and for the first half, sales outside of the U.S and Europe accounted for 40% and rose by 5%.

Pharmaceuticals and Vaccines sales were over $8.2 billion in the second quarter and over $16.6 billion in the first six months. For the second quarter, the respiratory division generated revenues of over $2.8 billion and over $5.7 billion for the first six months. A major contribution to respiratory sales was the Seretide/Advair product which generated revenues of over $2 billion in the second quarter and over $3.9 billion in the first half of the year. GlaxoSmithKline's HIV division generated over $540 million in sales in the second quarter and over $1 billion in the first six months. Consumer Healthcare generated over $1.9 billion in revenues in the second quarter of which more than $750 million came from Total Wellness, and more than $900 million came from markets outside the U.S and Europe. For the first six months, Consumer Healthcare generated over $4 billion in sales, with over $1.6 billion from Total Wellness, and over $1.9 billion from markets excluding the U.S and Europe.

GlaxoSmithKline has completed its acquisition of Human Genome Sciences (HGSI) and it is now trying to look more closely at what the acquisition brings to them. It is acquiring several new drugs with good potential and promising prospects. The two companies have had a relationship over 20 years and GlaxoSmithKline will now have total ownership of two experimental drugs and a drug that is already on the market. The drug in the market is Benlysta which happens to be the first treatment for lupus approved by the FDA in almost 50 years. Lupus affects around 5 million people throughout the world and the market looks promising. There is competition in the form of the lupus treatment blisibimod, from Anthera Pharmaceuticals (NASDAQ:ANTH), but Anthera is a much smaller company with no drugs on the market and it remains to be seen how formidable this competition is going to be. However GlaxoSmithKline will have to work hard at the marketing to generate sizable sales and profits from the treatment.

The first experimental drug is darapladib, which is a drug meant to prevent heart attacks and strokes. This will be of help because the older generation of GlaxoSmithKline heart drugs, Coreg and Arixtra, are now threatened by generics and are struggling to maintain sales volumes. However, at the time of announcing the acquisition, GlaxoSmithKline said it would not know whether the drug was effective or not for two more years. This is quite common for new experimental treatments and the company certainly has the resources to see it through successfully.

Another experimental drug that looks promising is the type 2 diabetes drug albiglutide. You will recall that GlaxoSmithKline's main diabetes drug Avandia has been banned in the European Union and highly restricted in the United States because of its connection to heart attack risk. Albiglutide, on the other hand, has shown good results in its recent study on cardiac safety and could thus be a suitable replacement. GlaxoSmithKline also recently announced that albiglutide shows statistically significant reduction in blood sugar levels when compared to Merck's (NYSE:MRK) sitagliptin. It is planning to seek approval in early 2013 but the drug will compete with treatments from Novo Nordisk (NYSE:NVO) and Amylin Pharmaceuticals (AMLN), which is in the process of being acquired by Bristol-Myers Squibb (NYSE:BMY). There was the competition from experimental drugs being developed by Eli Lilly (NYSE:LLY) and Sanofi (NYSE:SNY), so this is going to be a highly competitive market.

The company's research and development results continue to be impressive and 15 phase III trials reports are scheduled for this year. 12 reports have been received and 10 show positive data which is a very good track record. It looks as if the company may have two potential blockbusters in the pipeline. The respiratory drug candidate Relovair hasn't had particularly good efficacy numbers but Zephyr, also partnered with Theravance (THRX), looks far more promising. However, the data has been frustratingly inconsistent, and that has led to a large range of estimates for sales from a $750 million not bad drug to a $2 billion-plus blockbuster. Novartis (NYSE:NVS) and Forest Labs (NYSE:FRX) are developing their own treatments with their COPD drugs and this could be a highly competitive market. The data on dolutegravir in HIV was quite promising showing 10% better efficacy than Gilead's (NASDAQ:GILD) Atripla and also better safety and tolerability. This means that the drug at least comparable with Merck's Isentress, and the sales potential could be anything between $1 billion and $3 billion. Remember that is shared through the company's HIV joint venture with Pfizer (NYSE:PFE) (called ViiV), and Shionogi is also a partner.

Compared to the top U.S. pharmaceutical companies like Johnson & Johnson (NYSE:JNJ), Pfizer, Merck and Abbott Laboratories (NYSE:ABT), GlaxoSmithKline has the lowest price to earnings ratio as well as the lowest price to sales ratio. The dividend yield is mouthwatering at 4.5%, which is around 100 bps higher than the top four U.S. pharmaceuticals companies. GlaxoSmithKline also has the highest operating margins apart from Pfizer. By no means can this be described as a growth stock because of its flat sales, but, if you are looking for an income stock with a highly attractive dividend yield, I would strongly recommend that you buy GlaxoSmithKline.

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.