I like to consider myself a contrarian investor, so when share prices fall I naturally become more interested in buying. Likewise, when they go up I feel an urge to lock in some profit and move on.
So, the news that shares in GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) had recently fallen by 3-4% caught my eye and I became interested in buying some.
The reason for the share price fall was that US regulators issued draft guidelines that increased the chances of generic competition for one of its highest-selling drugs, Advair.
Indeed, the FDA (the US Food & Drug Administration) released proposals on the specific conditions under which companies would be allowed to produce cheaper versions of Advair, meaning that one of GlaxoSmithKline’s ‘blockbuster’ drugs would have to either reduce its price or else be overlooked in favour of lower cost alternatives.
Of course, Advair is one of GlaxoSmithKline’s key drugs and accounts for £5 billion (or 20%) of revenue. However, I believe that with the proposed changes not due to take effect for up to three years, GlaxoSmithKline has sufficient time to find at least one replacement.
Indeed, GlaxoSmithKline’s drug pipeline is very strong. Unlike AstraZeneca, which is currently experiencing a ‘patent cliff’, GlaxoSmithKline has a handful of potentially ‘blockbuster’ drugs that it is hoping will be granted (or at least much closer to being granted) FDA approval over the next year.
Therefore, the loss of one key drug may not necessarily hit the company as hard as the market anticipates.
Furthermore, the FDA’s move may actually have a positive effect on the company; spurring it on to focus more resources and more capital on research and development. The sale of the Ribena and Lucozade brands, moreover, gives the company additional firepower with which to replace Advair with another £1 billion plus revenue generator.
In addition, I’m keen on GlaxoSmithKline because it offers a great yield of 4.7%, as well as trading on a price-to-earnings (P/E) ratio of 14.1. Both of these figures compare very favourably to the FTSE 100 and to the healthcare industry group. They offer P/Es of 15.1 and 17.2 respectively, while their yields are below GlaxoSmithKline’s, being 3.5% for the FTSE 100 and 4.3% for the healthcare industry group.
So, with shares in GlaxoSmithKline offering an attractive yield, a relatively low P/E and a strong pipeline of potential future ‘blockbuster’ drugs, I’m feeling more bullish than ever on the company’s prospects.
