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GlaxoSmithKline winning over City number crunchers

Is the market being too negative about the prospects for the HIV franchise and generic competition to its best-selling asthma treatment, Advair?
gsk office
The UK's largest drug company is rushing to replenish its drugs pipeline

An 18% slide in the value of GlaxoSmithKline plc (LON:GSK) over the last year has priced in the worst-case scenario for drug giant, according to Kepler Cheuvreux, one of two brokers assessing the outlook for GSK in the wake of its prelims earlier this week.

Kepler has upgraded its stance to ‘hold’ from ‘reduce’ as the share price, £12.95 currently, is well below its £13.40 target.

Analyst Mark Belsey believes the market is now being too negative about the prospects for the HIV franchise and generic competition to its best-selling asthma treatment, Advair.

Income stock

He also flags up GSK’s credentials as an income stocks with a yield of well over 6%.

The German outfit Berenberg repeated its ‘buy’ call on GSK shares, though it has tweaked down marginally its price target to £17.05.

Analyst Laura Sutcliffe sees copycat competition to Advair being a big issue for GSK, which prompted her to take a forensic look at the pipeline of products being developed by the company.

“We have assessed 11 of them based on the clinical information that is available, likely approval timeline and risk of encountering commercial pitfalls,” Sutcliffe said in note to clients.

“While GSK does not have an industry-leading pipeline, we think there is enough there to restore investor confidence over the next 12-18 months and drive a re-rating of the shares.”

GSK warning 

On Wednesday, GSK warned that increased competition in its core HIV and respiratory businesses could hit 2018 earnings.

At constant exchange rates, adjusted earnings per share grew 4% in 2017 to 111.8p, but GSK sees them flat to down 3% in 2018 if generic versions of its blockbuster Advair asthma treatment launch later in the year as expected.

In the US, Advair generated sales of £1.6bn in 2017, but should competition from generics materialise, GSK reckons sales in the States will dive to around £750mln.

If a generic substitute doesn’t come on the market, the FTSE 100 drugmaker expects 2018 earnings to rise by between 4-7%.

Despite the Advair uncertainty and looming competition from Gilead Sciences Inc’s (NASDAQ:GILD) rival HIV treatment, chief executive Emma Walmsley said she was “increasingly confident” her company could continue to deliver mid-to-high single digit earnings growth over the next few years.

Forecasts topped

Overall, the UK’s largest pharma outfit topped expectations with its fourth quarter results.

GSK reported a fourth-quarter adjusted EPS of 27.2p, on sales of £7.64bn. According to Thomson Reuters, the Square Mile had been expecting 26.0p and £7.49bn.

The London-based firm added it had taken a one-off tax charge of £1.7bn in its 2017 earnings as a result of the recently-introduced tax reforms in the US.

Going forward though, Glaxo expects the changes to lower its effective tax rate on underlying profits by two to three basis points.

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