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The Market Is Underestimating GlaxoSmithKline Plc

GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) has been out of favour with the market recently. Indeed, accusations of illegal sales practices within China and the loss of exclusive manufacturing rights for a number of treatments have scared investors away from the company.

In particular, investors have been most concerned about Glaxo’s loss of exclusive rights to its manufacture blockbuster ADVAIR treatment, and ADVAIR DISKUS delivery device. Unfortunately, City analysts predict that the loss of ADVAIR sales, which account for around 20% of Glaxo’s annual turnover, will wipe 5% off the company’s valuation.

In addition, some investors have expressed concern about Glaxo’s divestment of the Ribena and Lucozade brands, which gave the firm some diversification outside of the pharmaceutical sector.

Not following the herd

However, despite these worries Glaxo has been taking steps to ensure that in the long term, the company achieves the best results for its investors. For example, the company is trying to move away from the ‘blockbuster’ mentality of the business, where one treatment accounts for the majority of the company’s sales.

That being said, Glaxo has not had much luck recently after two of its most promising treatments were written off as they were proved unsafe in clinical trials.

Nonetheless, at the beginning of November, investment research firm, Morningstar’s top analysts ranked the major drug companies in order of their treatment pipelines. Morningstar’s analysts found that despite Glaxo’s recent setbacks, the company’s treatment pipeline appeared to be the most promising in the biotechnology sector.

A low valuation

And this is why I feel Glaxo is undervalued. You see,Glaxo’s position at the top of the list is impressive when we take into account the fact that the company was being weighed up against biotechnology heavyweights, Sanofi, Johnson & Johnson and Pfizer

What’s more, Glaxo is currently trading at a historic P/E of approximately 14, below the biotech’s sector average of around 20. Moreover, Glaxo is also undervalued when compared to its larger international peers, who according to Morningstar have a less impressive treatment pipeline.

For example, Johnson & Johnson is currently trading at a historic P/E of 20, Pfizer is trading at a P/E of 21 and Sanofi is trading at a historic P/E of 29.

Foolish summary

All in all, Glaxo has the best pipeline and is primed for future growth but it would appear that investors are missing out on this. 

Other opportunities

Biotechnology companies like GlaxoSmithKline can be hard to evaluate. However, biotech's are usually prized for their strong profit margins, which they usually pass on to investors.

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> Rupert does not own any share mentioned within this article. The Motley Fool has recommended shares in GlaxoSmithKline.