GlaxoSmithKline -- and its long-suffering shareholders -- deserve a shot in the arm from H1N1…
GlaxoSmithKline (LSE: GSK) is expert in the microscopic world of viruses and bacteria, but everything else about this company is big, from its market capitalisation to the challenges it faces.
At £60 billion, Glaxo is the UK's fourth-largest listed company and the world's second largest pharmaceutical group. It employs some 100,000 people in 100 cities, who last year generated over £24 billion in revenues and nearly £7 billion in profits.
You might think we'd celebrate such a national champion, if you hail from North America or France.
But if you're British, you maybe relish knocking Glaxo, just like we lambasted the alleged profiteering of BP (LSE: BP) and Royal Dutch Shell (LSE: RDSB) or rubbished the now lamented mega-profits of Britain's biggest banks.
Nothing to sneeze about
Glaxo's latest PR crime is gearing up to profit from swine flu vaccines.
Earlier this week, the press claimed Glaxo's upcoming vaccine will cost £1 a course to make, but £6 to buy -- an outrageous mark-up according to some papers (who presumably charge just for paper and ink).
Never mind that, Glaxo (which disputes the figures) has been preparing for a global flu pandemic for nearly two decades.
Chief exec Andrew Witty says it has spent $2.5 billion in the past four years alone to grow manufacturing capacity ahead of the long-expected outbreak.
Glaxo is already profiting from the swine flu outbreak anyway, thanks to its anti-viral drug Relenza.
According to second-quarter results released this week, quarterly sales of Relenza increased 20-fold year-on-year to £60 million, with first-half sales hitting £230 million. Glaxo has tripled capacity to produce 190 million courses a year, which should generate £600 million.
Meanwhile the swine flu vaccine isn't expected until September, but governments of 16 countries have already ordered 195 million doses. While pricing remains uncertain, that should add at least £1 billion to Glaxo's full-year revenues, and it is in sales talks with another 30 countries.
Patently a problem
Making billions from swine flu guarantees bad headlines for Glaxo, regardless of all the people its treatments help, or that it supplies flu drugs cheaper to poorer nations -- or that if we relied on the State, we might as well ask for a flying pig vaccine.
Hopefully politicians will shrug off a baying press, let alone take action after any 'flu windfall', because the billions can't come soon enough for Glaxo.
As I say, everything is big about this company, and that includes the black hole in sales that its blockbuster drugs are leaving as their patents expire.
Amid second-quarter revenues of £6.7 billion, an incredible £1.2 billion came from just one drug -- the asthma treatment sold as Advair in the States. The patent in the States expires in 2010. The group's second most important product, the herpes treatment Valtrex, contributed just £379 million. That US patent expires this year.
Other patents in the Glaxo stable have already gone, and with them sales as generic providers satisfy demand more cheaply.
Accordingly, for years now the game for analysts has been to guess which of Glaxo's upcoming drugs might hit superstar status.
Some 30-odd treatments are in late-stage trials, of which the anti-malarial product Mosquirix looks particularly promising -- although commercial launch is still several years away, and the bad headlines write themselves given the poor nations where malaria is prevalent.
Some new products also provide hope, especially vaccines such as Cevarix, sales of which doubled in the quarter to £73 million, and Rotarix, where sales were up 69%.
The red pill or the blue pill?
The trouble is, these drugs and vaccines cost hundreds of millions to bring to market. Yet even as costs escalate, the competition from generics grows and sales of Glaxo's prescription drugs fall further.
Public sentiment is also against big pharma -- something unlikely to be improved by the swine flu pandemic -- and President Obama's healthcare reforms also dog sentiment.
The net result is that at 1,160p per share, Glaxo's shares are well below the £20 level they hit nearly a decade ago.
"Elephants don't gallop", said legendary investor Jim Slater about big companies, but for Glaxo it's been more a case of 'hippos wallow'.
The new boss Andrew Witty is trying to change tack, with more emphasis on R&D and a wider range of products, and less talk of blockbusters.
Accordingly, Glaxo has agreed to buy US skincare business Stiefel for up to $3.6 billion. The move triples dermatology revenues and secures 15 late-stage products, too.
Glaxo is also offsetting its weakening American prospects with sales to emerging markets -- up 14% in the second quarter.
Income investors can take a chill pill
Can this already-vast company really prosper by further diversifying and diluting its focus?
For income investors content to let management find out, the company looks cheap.
Glaxo hiked its second quarter dividend 8% to 14p per share, with 60p per share expected for the full year -- a 5.4% yield, nearly twice covered. The dividend has risen nearly 50% over the past five years, while the share price has headed in the opposite direction.
The forward P/E is around 10 and isn't ultra-cheap these days, but it is well below the rating Glaxo once enjoyed.
Might the shares be re-rated? Besides the swine flu boost, the underlying numbers suggest it's worth growth investors taking a look -- my fellow Foolish writer Paidraig O'Hannelly found Glaxo was one of only 15 shares to meet his John Neff-style trawl.
Near term, an investment in Glaxo looks a safe bet. Swine flu won't save Glaxo's bacon in the long-term, but it might provide the breathing space for those 100,000 employees to come up with something that will.
Disclosure: Owain owns shares in GlaxoSmithKline.
