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Something to Love about GSK

|Includes: GlaxoSmithKline (GSK)

Courtesy of Pharmboy 
[Visit Pharmboy here for his previous articles on pharm/biotech stocks and chapters in his TA book.]
 
UK-based GlaxoSmithKline was ranked as the world’s fourth largest player in 2009 (behind US-based Pfizer, France-based Sanofi-Aventis and Switzerland-based Novartis) based on prescription pharma sales. The company was founded in 2000 via the merger of Glaxo Wellcome and SmithKline Beecham and is headquartered in Brentford, London, UK.  I wrote about GSK in my first PSW write-up in 2009.

In terms of its therapeutic focus, GSK owes its market-leading position in the global respiratory market to the Glaxo Laboratories legacy.  Over 30 years ago, Glaxo launched Ventolin for the treatment of asthma and developed and launched Serevent and Flixotide in 1990.  A combination of these two compounds—sold under the brand names Seretide/Advair ($7.8B in 2009).  Similarly, GSK’s origins in the CNS market—currently its third largest therapeutic area of focus—can be traced back to the Wellcome and SmithKline scientists.  Other therapeutic areas of importance include infectious disease and virology (vaccines).

Click here for table. 

The merger of Glaxo Wellcome and SmithKline Beecham created a company with a strong portfolio of blockbuster brands including Seroxat/Paxil (depression),now off patent Seretide/Advair (asthma, COPD) which dominates the respiratory arena, Wellbutrin (depression) now off patent, Augmentin (infections) now off patent, Avandia (diabetes), Imigran/Imitrex (migraine) and Lamictal (epilepsy) now off patent. However, since its creation in 2000, GSK has failed to add to its portfolio with any additional blockbuster drug launches.  Instead, like its rival Pfizer, GSK has been forced to implement cost reductions in the medium term. Sales of Seroxat/Paxil have been eroded by generics (as have Augmentin and Wellbutrin ) in the US market prior to 2011.  In addition, its second largest product Avandia faces declining sales as a result of concerns that have emerged regarding its side-effect profile (e.g., its association with a heightened cardiovascular risk).  Many feel that the company faces pressure from investors to revive its performance. and must turn to M&A activity.  Thusfar, GSK has been reluctant to make such a move (Gilead for the HIV franchise?). 
 
What GSK has done instead is sought to in-license product rights in order to boost the sales potential of its portfolio.  Of the eight products launched by GSK since 2000, four have been in-licensed (Lexiva from Vertex, Levitra from Bayer, Boniva from Roche and Vesicare from Astellas). However, to date, none of these drugs have generated sales growth to make an impact on the company’s bottom-line. Furthermore, in response to Pfizer’s proposed acquisition of Wyeth (2009) and Merck & Co.’s merger with Schering-Plough (2009), GSK has inferred that it will not follow this route. (I think Gilmartin at  his time at MRK said the same thing...he retired, and Boom).  Instead CEO Andrew Witty says that GSK will continue to implement in-licensing and small acquisitive strategies (focused notably on emerging markets and driving diversification into generics) to support internal growth (hummm).   GSK runs the risk of creating short-term benefit that compounds itself into a deficiency in the mid- to long-term if it fails to rectify its own shortcomings. - anotherwordds - big risks.  This is because GSK chooses to partner with a smaller player that may not have strengths that complement GSK’s current weaknesses in term of portfolio fit or better yet, development foresight that limits or delays the progression of a compound through clinic.
 
Sales growth is going to come from two franchises for the next few years:  Seretide/Advair (named Beyond Advair) and Avodart, respectively. Beyond Advair is essentially a once-daily version of Seretide/Advair (potentially the first once-daily ICS/LABA combination), while Duodart is a combination of Avodart and tamsulosin for the treatment of benign prostatic hyperplasia (BPH) - DNDN, hello!.   
 
But, more importantly, let's look at the pipeline.  First comes their Phase III insomnia therapy almorexant, a first in class orexin receptor antagonist (from Actelion; www.actelion.com).  Future sales growth is projected to be close to $1B (anticipated launch in late 2011).  Orexin is a neuropeptide hormone that is produced in the hypothalamus and functions as a modulator of the sleep-wake cycle.  In oncology, sales growth will be driven by growth of Tykerb/Tyverb (used as a treatment for women's breast cancer in treatment naive, ER+/EGFR+/HER2+ breast cancer patients (now often called "triple positive") and in patients who have HER2-positive advanced breast cancer that has progressed after previous treatment with other chemotherapeutic agents), Revolade/Promacta (developed for conditions that lead to thrombocytopenia) and Arzerra (also known as HuMax-CD20) is a human monoclonal antibody (for the CD20 protein) which appears to inhibit early-stage B lymphocyte activation) sales. CNS growth primarily via almorexant and immunology and inflammation growth via its acquisition of Stiefel in 2009 . 

Many, many other drugs (> 20 by my last count) in the respiratory and neurosciences are in Phase II, so it is too early to tell where these will be, but we should have a better idea in a year or so about the companies prospects.  There are a few very interesting and compelling targets/drugs, but those need to be reserved for after Phase II, as many things can happen between now and then.

With the higher dividend yield than its peers and a P/E a bit less than PFE, I like GSK bouncing in this range for a while.  Buying the stock for about $35 and selling the January 2012 puts (1 put per 100 shares of stock) for $5.50 and January 2012 calls for $3.30 (1 call per 100 shares of stock) gives a nice return 25% if called away, not including the dividend one collects along the way.
 



Disclosure: none