GlaxoSmithKline is still growing, and the yield isn't too bad either. But there may be better places to invest your money.
The merger between Glaxo Welcome and SmithKline Beecham to form GlaxoSmithKline
(LSE: GSK)
at the end of 2000 was supposed to herald great things for the British pharmaceutical pairing. But it has been anything but. And investors who remained loyal since the merger may want to consider taking a couple of tranquillisers to calm their nerves
For instance, since 27 December 2000 when the two British drug makers united, shares in the world's second biggest pharma have gone into reverse. When the two companies first merged they boasted a market value of about £117b. Today the business is worth £88b. And even regular dividends have not helped to ease the pain. The total return on the shares, which includes dividends, is an appalling minus 9%. What's more, it has underperformed the UK market, which has delivered a total return of plus 26% over the same period.
Without question, losing patents on some key medicines has been a bitter pill for GSK to swallow. For example, it lost patent protection for Paxil in 2003, which boasted annual sales of almost £2b at its peak. So, by 2006 annual sales of the antidepressant had plunged to just £615m. That said, patents are part and parcel of running a drug discovery business. Consequently, GSK along with other cutting-edge drug developers need to ensure that their pipelines can sustain growth.
In the case of GSK, the pipeline looks quite plentiful. Its Tykerb breast cancer medicine has reached approval stage, and Cervarix, a vaccine for human papillomavirus, is also awaiting regulatory approval. Other drugs close to approval include Entereg for post operative bowel obstruction, and rosiglitazone for treating Alzheimer's disease.
However, ensuring a full drug pipeline is sometimes not enough to sustain top line growth. Pharmaceutical companies are now as much at the mercy of governments, as they are from competitive pressure from rivals.
Consider the recent refusal by the NHS to allow Alzheimer's disease patients to access certain drugs. The National Institute for Clinical Excellence (NICE), which monitors the cost effectiveness of medicines, said Galantamine should be restricted because they were poor value for money! Aside from NICE, Governments in European are regularly cutting back on what they are prepared to pay for new drugs.
But on the face of it, GSK is still growing. The company said today that its third-quarter profits grew 15% and sales rose 3%. For the full year, profits are expected to rise by a mid-teen percentage, which justifies its valuation of 15 times earnings. Additionally, the 3% yield, although not spectacular, is quite healthy.
But the question is why would you bother to invest in GSK at all? Currently, the FTSE is a tad cheaper, and the yield is roughly comparable. So investing your money in a tracker may be a better idea. Additionally, you won't have to worry about the attendant problems that await the pharmaceutical industry.
David owns shares in GlaxoSmithKline.
