The Surprising Buy Case For GlaxoSmithKline plc

Today I am looking at an eye-opening reason why shares in GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) are set to benefit from a drive to create a more efficient earnings-generating machine both through exciting acquisitions and strategic disposals.

Lean machine to deliver blockbusting earnings

GlaxoSmithKline continues to be a dominant player on the M&A scene as it bids to enhance its juicy pipeline of new products.

Indeed, the firm’s purchase of Human Genome Sciences for $3bn last August, which gave it complete control of the Benlysta lupus treatment, illustrates the firm is not afraid to stake large sums on what it considers to be potentially game-changing deals.

More recently, the company shelled out £214m for Swiss firm Okairos to enhance its own vaccine development operations. And the FTSE 100 group reiterated its commitment to use free cash flow “to support increasing dividends, share repurchases or, where returns are more attractive, bolt-on acquisitions” in July.

The firm’s pro-active approach to disposals is also helping to create a more streamlined, earnings-busting beast.

Just this week GlaxoSmithKline advised sharehikder that it had sold off its Arixtra and Fraxiparine thrombosis brands, as well as its Notre-Dame de Bondeville manufacturing complex, to The Aspen Group — in which it holds an 18.6% stake — for $700m.

GlaxoSmithKline said that the latest move was part of its “commitment to increase focus on products with the most growth potential and the delivery of its late-stage pipeline“.

The latest deal between the two entities still allows GlaxoSmithKline to market the products in China, India and Pakistan, and critically fits in with the  Brentford-based firm’s focus on executing its late-stage pipeline and concentrate on launch preparations for its approved products.

The pharma play’s activity on the M&A scene is helping to bolster its already-promising product pipeline. Last month the company’s Tivicay integrase inhibitor — used to block the spread of the HIV virus and developed by its ViiV Healthcare joint venture — received approval from the US Food and Drug Administration (FDA).

Of course the road of medicinal development can be a complicated and rocky process.

GlaxoSmithKline announced in September that its MAGE-A3 immunotherapeutic product for the treatment of skin cancer had failed to achieve its first co-primary endpoint during Phase III trialling. Work will continue but results are not expected until 2015.

Still, the company’s new product channel has an excellent track record of producing earnings-driving treatments to offset such disappointments, as well as the effect of product patent expirations affecting the entire pharmaceuticals industry.

GlaxoSmithKline has attained US approval for its Breo Ellipta, Mekinist and Tafinlar productsin recent months, and a slew of fresh Phase III data is expected in coming months for other potentially revenues-busting products. I believe that the drugs firm’s bubbly pipeline, helped by its moves on the M&A front, should drive earnings higher over the long term.

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