GlaxoSmithKline (GSK) is one of the UK largest companies with a market cap of some £56.0 billion. However you get an impression of faded grandeur, when you dig into the stock.
These days the company is a “ focused” biopharma business, whose research and development activities centre on treatments in four key areas. Which are infectious diseases, HIV, immunology/respiratory and oncology.
The company’s mission statement talks about positively impacting the health of 2.50 billion people by the end of the decade, which of course is commendable.
However, as investors we need to consider whether GSK is the best home for our money, in this highly competitive sector.
The poster boys in large cap pharma over recent years have been the makers of weight loss drugs, most notably Eli Lilly LLY US, and Novo Nordisk.
Eli Lilly is up by almost +200.0% over the last three years. Whilst Novo Nordisk has rallied by +103.0% over three years, and by +276.0% over five years, to become the largest company in Denmark in the process.
Unfortunately GSK has seen its stock price fall by almost -32.00% in the last three years and by -39.40% over the last five years.
German bank Bereneberg recently lowered its target price on GSK to £16.00 from £18.20.
However, the stock is trading well below even this reduced target, printing at £13.63.
At that price GSK is on a forward PE ratio of 7.78 times, which sounds cheap.
However, they look less of a bargain when you realise that GSK hasn’t grown revenues over the last 5-years, whilst its earnings have grown by just +5.64% in that time frame.
Its dividend, which for many years was one of the attractions of the business, has actually shrunk by more than -11.00%, over those 5 years.
GSK isn’t alone in feeling the pressure, fellow FTSE 100 stock and drugmaker Astrazeneca is also down by around -15.00%, over the last 6 months, matching GSK’s fall almost point for point.
US investment bank Jefferies summed up the issue facing potential GSK investors in a recent report on the sector, when it said that:
“We have sensed declining generalist interest in Pharma for much of 2024,(which is) never helped by the sector’s complexities…….. US political uncertainties are an overhang for the sector going into the new
Trump administration, given risks to vaccine mandates/sentiment, FDA budgets & approval pathways”.
The bank’s analysts maintain a hold recommendation on GSK and perhaps one of the reasons for that is the sense of “jam tomorrow “ that surrounds the company’s pipeline of new treatments.
Such as long-acting HIV injectables, which are not expected to make a material difference to GSK earnings until 2027.
In fact the consensus recommendation for GSK is a hold and the £16.29 target price among the 12 analysts that follow the stock, looks more like a token gesture, rather than something that’s obtainable near term.
Outlook
It’s possible that the Trump administration’s clampdown on costs within the US healthcare system won’t be as hard hitting as has been billed. In which case we could see a relief rally in GSK’s stock price. But that won’t address the shortcomings of business, for that to happen we need self help and new wonder drugs.
In the absence of those catalysts, I have to conclude that there are better homes for your money and rate GSK at 2.5 out of 5.
Pros
- Low valuation (PE)
- Strong HIV pipeline
- Potential relief rally
Cons
- Revenue stagnation
- Shrinking dividends
- Pipeline delays
-
Outook
(2.5)
Overall
2.5
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