Is GlaxoSmithKline plc Set For Electrifying Earnings Growth In 2014?

A common theme striking big-cap pharma plays such as GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) has been the widescale loss of patent on key products, a scenario that has weighed significantly on revenues in recent times.

Although this is likely to remain a major issue far into the future, in my opinion GlaxoSmithKline’s drive to replenish its drugs pipeline should start boosting the top line sooner rather than later.

Massive investment starts to deliver the goods

GlaxoSmithKline is already witnessing the fruit of these endeavours, the firm receiving four approvals during July-September and filing another three. The group also submitted fresh approvals in Europe and the US last month for its single-tablet regimen (STR) treatment for HIV, a market regarded as one of the firm’s red-hot growth areas.

The firm has not been shy in flashing the cash to secure long-term growth. From huge acquisitions like that of vaccine developer Okairos in the spring — to its decision this month plans to set up new satellite R&D centres in the US — GlaxoSmithKline continues to up the ante in its quest to develop the next generation of earnings blockbusters.

Investors should of course be aware that product sign-offs can be an unpredictable process, and that failures can run into the billions. Most recently, approval of its Relvar Ellipta drug in Europe last month — which is used to treat asthma and chronic obstructive pulmonary disease — was offset by news that its Darapladib drug, designed to cut the chances of heart attacks and strokes in patients, had failed Phase III testing, forcing GlaxoSmithKline back to the drawing board.

Furthermore, GlaxoSmithKline is set to face the music in the coming year from Chinese authorities investigating claims that executives had attempted to massage sales by bribing doctors in the country. Group sales in China have plummeted 61% since investigations commenced earlier this year, and even though the firm has put the scandal down to rogue workers, an adverse decision could derail GlaxoSmithKline’s earnings ability in the rapidly-accelerating economy over the long term.

City analysts expect earnings per share (EPS) to punch a fractional improvement this year, to 112.9p from 112.7p in 2012. However, forecasters are undoubtedly more excited about GlaxoSmithKline’s prospects next year as its pipeline churns out the next generation of revenues-busting products — indeed, brokers expect EPS to advance 7% in 2014, to 121.2p.

Based on these projections, the business currently deals on a P/E rating of 13.4 for next year. Considering that pharma rival AstraZeneca trades on a modestly lower corresponding reading of 12.5, and whose bare pipeline is expected to deliver a third consecutive EPS decline next year, I believe that GlaxoSmithKline is a decent stock selection for strong growth for 2014 and beyond.

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> Royston does not own shares in any of the companies mentioned in this article. The Motley Fool has recommended shares in GlaxoSmithKline.