Why GlaxoSmithKline plc’s Investment Plans Should Thrust Earnings Skywards

Royston Wild evaluates how GlaxoSmithKline plc’s (LON: GSK) heavy capex spend should drive profits higher.

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Today I am looking at why I believe GlaxoSmithKline‘s (LSE: GSK) (NYSE: GSK.US) expenditure plans will underpin robust long-term earnings growth.

Extensive R&D work to turbocharge growth prospects

GlaxoSmithKline has suffered heavily from the effects of patent expiration on a whole host of its products in recent years. Ploughing vast sums into its laboratories has therefore been of the utmost urgency to resuscitate revenues, and the Brentford-based firm forked out a gargantuan £3.92bn in R&D alone last year.

Such measures are not guaranteed to yield results, however amd I highlighted the problems associated with drug development in my last article on the company (“2 Resounding Reasons To Sell GlaxoSmithKline”) and the impact this can have in terms of lost revenues and wasted development costs.

GlaxoSmithKlineIndeed, the pharma giant announced recently that its MAGE-A3 immunotherapeutic drug for the treatment of lung cancer had failed Phase III testing at both the first and second co-primary endpoints. The trial for the revolutionary drug — which uses the body’s immune system to combat cancerous cells — had been strung over a 27-month period, consuming vast amounts in time and resources.

But by and large, GlaxoSmithKline has been hugely successful in charging up its pipeline and getting new products on the shelves. The firm received six approvals for major new drugs in 2013, and moved a step closer in recent weeks to getting its Anoro and Incruse products — used to tackle chronic obstructive pulmonary disease — rolled out in Europe.

GlaxoSmithKline has identified the specific areas of respiratory, vaccines, HIV and oncology as high-growth earnings drivers, and is divesting assets elsewhere in order to fund research in these areas — the pharmaceuticals giant raised £2.5bn in 2013 alone through asset sales, most notably the shedding of its Lucozade and Ribena labels for £1.4bn.

GlaxoSmithKline also remains lively on the M&A front to boost growth, and bought out Swiss-based vaccine specialists Okairos last spring for £205m. The company is also investing heavily to latch onto the smashing earnings potential of emerging markets, and earlier this month raised its stake in its GlaxoSmithKline Pharmaceuticals subsidiary in India from 50.7% to 75% at a cost of £625m.

The loss of exclusivity on key drugs has seen GlaxoSmithKline’s earnings fluctuate wildly since 2009. And although performance has stabilised in recent years, the company is anticipated to follow 2013’s 1% earnings per share advance with a similar drop in the current 12-month period, according to City analysts.

Still, a projected 8% advance in 2015 indicates that the company’s intensive R&D operations are about to take hold. I believe that rolling investment in organic operations, as well as the strong prospect of further acquisition activity, should underpin robust earnings growth over the long term.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston does not own shares in GlaxoSmithKline. The Motley Fool has recommended shares in GlaxoSmithKline.

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