GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) is cheap. Really cheap, there is no other way of putting it. Indeed, Glaxo currently trades at a valuation lower than all of its international peers within the biotechnology sector.
Chinese concerns
Glaxo’s recent declines can be traced back to the company’s Chinese problems. Glaxo is facing an investigation by UK and US authorities, over allegations that the company’s employees bribed doctors and officials within China to boost the company’s sales in the country.
Unfortunately, it has also been announced today that Glaxo was found guilty of bribing Chinese officials more than a decade ago. Experts believe that due to this repeat offending, regulators could take a tougher stance against the company.
Rude health
Nevertheless, aside from the Chinese issue, Glaxo is in rude health. Many analysts have praised Glaxo’s pipeline of treatments under development, rating the pipeline as one of the best in the sector. Moreover, Glaxo’s recent deal with Novartis is a game changer for both the company and shareholders. The deal saw Glaxo dispose of its oncology portfolio for $16bn, while acquiring Novartis’ global Vaccines business for $5.3bn.
In addition, as part of the deal Glaxo and Novartis will create a new Consumer Healthcare business, with 2013 pro forma revenues of £6.5 billion. Glaxo will have majority control of this world leading Consumer Healthcare business with an equity interest of 63.5%.
Making a recovery
What’s more, Glaxo is taking steps to restructure its business and rebuild trust in its brand after the Chinese scandal.
Specifically, Glaxo is aiming to become the first company in the drugs industry to stop paying outside doctors to promote its products. Management also wants to end the process of paying sales representatives for hitting sales targets.
In China sales declines are already slowing. Before the bribery scandal erupted last year, Glaxo’s China sales had risen 14% year on year during the first half of 2013. However, after bribery revelations, Chinese revenue plunged 61% during the third quarter of 2013. This decline has since moderated, sales only decline by 20% during the first quarter of 2014.
Bargain bucket
Despite Glaxo’s promising treatment pipeline and deal with Novartis, the company is still in the bargain bucket — there’s no other way of saying it.
In particular, the average P/E of Glaxo’s major international peers, including Eli Lilly, Merck, Pfizer, Roche and Sanofi is around 23.7. At present, Glaxo is only trading at a historic P/E of 13.5. Even though the issues in China are concerning, this valuation gap is excessive.
