GlaxoSmithKline Shares Still Undervalued

Glaxo's next-generation respiratory drugs should help offset branded and generic competition to leading drug Advair, Morningstar analysts say

Damien Conover 31 July, 2018 | 11:54AM
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GlaxoSmithKline is Popular with Income Investors

Morningstar analysts view GlaxoSmithKline (GSK) as undervalued after its latest set of financial results, with the investment community underappreciating the company's entrenched products and developing pipeline.

We don't expect any major changes to our fair value estimate of £17.90, above the current share price around £15.70. We forecast average annual sales growth of 3% during the next decade, with new products offsetting generic competition due to patent losses.

Growth in emerging markets should help mitigate the patent losses in developed markets, as brand names are more important in emerging markets and give products a much longer lifecycle. Also, steady growth from vaccines and consumer healthcare products should reduce the volatility from patent losses in the prescription drug business.

The company, which yields above 5%, announced an unchanged quarterly dividend of 19p a share, with the full-year payout expected to remain at 80p.

In tandem with the earnings release, Glaxo provided a strategic update shifting the focus of its research and development to the immune system, which should improve the company's drug pipeline productivity and help support its wide moat, or large competitive advantage.

By increasing the utilisation of human genetic data in targeting medicines directed at the immune system, the company can increase the probability of success in drug development, in our view.

The Case for Glaxo

As one of the largest pharmaceutical companies, GlaxoSmithKline has used its vast resources to create the next generation of healthcare treatments. The company's innovative new product lineup and expansive list of patent-protected drugs create a wide economic moat, in our opinion.

The magnitude of Glaxo's reach is evidenced by a product portfolio that spans several therapeutic classes as well as vaccines and consumer goods. The diverse platform insulates the company from problems with any single product. The highest revenue generator, Advair, represents just under 10% of total revenue.

However, the complexity in approving a generic version of an inhaled drug like Advair has held off significant generic competition well past the drug's 2010 patent expiration, where approvals for generic inhaled drugs are particularly difficult. Further, the company's advancement of its next-generation respiratory drugs should help Glaxo maintain its entrenchment in both asthma and chronic obstructive pulmonary disease as generic Advair competition likely increases in late 2018.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
GSK PLC1,775.00 GBX-0.48Rating

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Damien Conover  is a guest author

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