Why I Hate GlaxoSmithKline plc

It is a thin line between love and hate, and there are times when I have crossed it with my stake in GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US). Here’s what I hate about it.

It’s a long-term underperformer

Over the last five years, the FTSE 100 has risen 64%. In that time, Glaxo has grown just 51%. That’s a poor show, for such a prominent FTSE blue chip. And things are getting worse rather than better, with the share price down 6% in the last six months. It didn’t help that pharmaceuticals and vaccines sales were flat in Q3 while group turnover grew a mere 1%. Has Glaxo got what it takes to turn this round?

And then there’s that China crisis

China is one of the biggest opportunities in the pharmaceutical sector, and Glaxo may just have fluffed it. The bribery scandal sparked a 61% drop in sales in the country, as doctors slammed the door on its sales staff. Reports suggest Glaxo will avoid a company-wide charge, which would also trigger ruinous US and UK fraud investigations, although several Chinese executives seem likely to be charged. If it’s lucky, Glaxo will get away with a major fine. If it’s unlucky, it could be booted out of the country. Either way, this is a bitter pill for investors to swallow.

The drugs don’t always work

Glaxo has suffered a brace of costly late-stage drug failures with the megablockbuster heart drug Darapaldib and cancer vaccine MAGE-A3. This is a reminder of just how expensive and precarious it is to bring new drugs to market. It is all too easy to find the pipeline suddenly running dry, just ask pharmaceutical rival AstraZeneca. Glaxo is doing comparatively better, but this supposedly solid business is constantly teetering on the brink of a patent cliff, as rivals develop cheaper alternatives, exclusivity runs out, and cheap generics ultimately win the day.

It could be bad in Japan

It’s bad enough being blamed for your own failures, even worse to be blamed for problems elsewhere. Last month, Glaxo’s share price took another knock after US competitor Eli Lilly warned that 2014 would be tough going, due to a slowdown in emerging markets and also Japan. With Glaxo heavily exposed to Japan, it didn’t take a great logical leap for markets to suspect it might find the going tough as well. Is Glaxo getting unlucky?

The numbers could be so much better

There’s one Glaxo number I love, and you can probably guess what: its 4.6% yield. Very nice, although I worry about its relatively thin cover of just 1.5. If earnings dip that could quickly become stretched. I’m happy enough with Glaxo’s valuation, at 14.3 times earnings. I’m not so happy with the recent 15% drop in operating profit, however, or the 9% fall in emerging market sales. Two consecutive years of nil or negative earnings per share growth aren’t too pretty either, although that is forecast to increase to 7% in 2014. These figures are a mixed bag. I expected better from Glaxo, and I hate to be disappointed.

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> Harvey owns shares in GlaxoSmithKline. The Motley Fool has recommended shares in GlaxoSmithKline.