Why You Should — And Shouldn’t — Buy GlaxoSmithKline plc

Today I am running the rule over the investment case for GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US).

More exclusivity losses on the horizon

GlaxoSmithKline, like the rest of the pharmaceuticals sector, has seen revenues growth smashed in recent years as patent losses across key products have relentlessly stacked up. Indeed, this factor is expected to have resulted in an 13% top line decline when 2014’s results are wheeled out next month, and City analysts do not expect sales to reach last year’s levels until 2017 at the earliest.

The business is due to lose exclusivity on its blockbuster Advair asthma treatment midway in 2016, a drug which is responsible for 27% of total revenues, while the devastating effect of patent losses is also smashing takings for Lovaza, Seroxat and Valtrex amongst others — turnover across its so-called ‘Established Products’ shot 17% lower during January-September. GlaxoSmithKline can only expect sales here to keep rattling lower as its rivals step up to the plate.

Research activity keeps on rolling

Although it could be argued that GlaxoSmithKline has been late to address the effect of crumbling patents, the company is chucking vast sums into organic R&D to mitigate this effect and create the next generation of earnings generators for the next five to ten years. The firm has around 18 products in Phase III testing at present, and has a better-than-average record of meeting regulatory requirements and getting product to market.

On top of this, GlaxoSmithKline also has the means to hoover up its pharma peers and make selective purchases in key growth areas. Indeed, the business is in the process of swapping its oncology operations for Novartis’ vaccines division, a move which will add terrific value to GlaxoSmithKline’s market-leading position in the respiratory and HIV sectors.

Chinese scandal continues to weigh

Investors breathed a sigh of relief in September when GlaxoSmithKline agreed to shell out £297m to settle a long-running corruption investigation with China, a matter which saw the drugs giant’s sales in the country fall off a cliff and resulted in the humiliating imprisonment and then deportation of regional chief Mark Reilly.

However, those expecting a rapid sales rebound in this crucial emerging market look set to be disappointed. Indeed, local media outlet Caixin reported this week that the business is about to slash a further 1,000 people from its workforce there, following the sacking of hundreds of sales agents in previous months. GlaxoSmithKline has plenty of work to repair the damage of its previous misconduct and get revenues moving higher again.

Dividends predicted to pound higher

Even though GlaxoSmithKline’s earnings outlook remains insipid at best, the company’s vast capital pile is expected to keep dividends ticking higher in the near term. The drugs play has shrugged off severe earnings volatility in recent years to keep the payout marching skywards and trump the market average.

And the City does not see this trend ending any time soon, with a predicted total payout of 80.1p per share for 2014 anticipated to rise to 80.6p in 2015 and to 80.8p in 2016. Consequently GlaxoSmithKline carries a monster yield of 5.4% through to the close of next year.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.