Right now I’m analysing some of the most popular companies in the FTSE 100 to establish if they are attractive long-term ‘buy and forget’ investments.
Today I’m looking at GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US)
What is the sustainable competitive advantage?
Like most biotechnology companies, GlaxoSmithKline’s main competitive advantage lies within its portfolio of treatments.
In particular, GlaxoSmithKline’s most lucrative treatment is the asthma drug Advair/Seretide, the world’s fourth bestselling treatment.
That said, GlaxoSmithKline has unfortunately lost the exclusive production rights to the Advair/Seretide treatment in many countries. However, as it has turns out, the Advair/Seretide treatment and delivery device has proven hard to replicate by generic manufacturers, so GlaxoSmithKline still has somewhat of an edge over its peers.
Still, while the complexity of Advair/Seretide has slowed some generic competition, GlaxoSmithKline is still facing the loss of exclusive manufacturing rights for a multitude of treatments within its portfolio.
Nonetheless, this loss of exclusive manufacturing rights is affecting the whole biotech industry, including the world’s biggest pharmaceutical company, Pfizer, so GlaxoSmithKline isn’t being left behind.
Indeed, the wave of patent expirations sweeping the biotechnology industry has ushered in a new age of cooperation within the industry. For example, many biotech companies are now working together on more complex treatments and GlaxoSmithKline is well placed to benefit from this trend.
Having said all of that, despite GlaxoSmithKline’s troubles, the company still the ability to set the prices on its products and maintain a stable profit margin. In particular, despite sales falling 7% during the past four years, the company’s operating profit margins has stayed stable at 28% over the same period.
Company’s long-term outlook?
GlaxoSmithKline’s outlook appears relatively stable. The group has now received final approvals for three of the six new treatments it recently filed with regulators and the firm is expecting final approval for 13 new treatments during 2013/2014.
What’s more, GlaxoSmithKline’s highly cash generative nature and low level of debt mean that the company can keep its pipeline of treatments underdevelopment well stocked and buy up smaller peers for additional growth.
Indeed, the recent acquisition of long-term US biotechnology partner Human Genome Sciences adds further momentum to GlaxoSmithKline’s its push for new products.
Foolish summary
All in all, although sales and profits are falling, the company has a strong product pipeline and a world-renowned brand.
So overall, I rate GlaxoSmithKline as a very good share to buy and forget.
