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The Bull Case For GlaxoSmithKline plc

The pharmaceutical industry is a rather brutal place in which to exist. After all, it centres around spending a vast sum of money to eventually develop a drug, a period of patent protection where sales are high and profits are generous, before generic competition eats away at sales and turns a blockbuster drug into something of a ‘has-been’.

This cycle can be tough to cope with for many companies, with a number of major pharmaceutical stocks experiencing so-called patent cliffs, whereby their pipeline fails to keep up with the loss of patents and their sales fall significantly. And, while GlaxoSmithKline (LSE: GSK) has seen its sales come under pressure, it seems to have been able to better position itself to cope with such challenges than many of its sector peers.

Looking ahead, GlaxoSmithKline’s pipeline is hugely appealing, with a number of exciting new treatments being in late-stage trials. Notably, its ViiV Healthcare subsidiary has the potential to transform GlaxoSmithKline’s top and bottom lines, with its potential being so great that a spin-off was mooted earlier this year. And, with GlaxoSmithKline reducing its exposure to the consumer goods market via the sale of brands such as Lucozade and Ribena, it now has a greater focus on developing its pipeline and on allocating greater resources to research and development.

Alongside an excellent pipeline, GlaxoSmithKline is also seeking to make itself more efficient. For example, it is aiming to make £1bn in cost reductions in the coming years, with staff cuts apparently due to deliver a sizeable proportion of the planned savings. Furthermore, it has decided to keep dividends at their current level over the medium term which, while disappointing in the near-term for income-seekers, means that GlaxoSmithKline will be able to invest even more capital in its pipeline and in future growth opportunities. This should put it on a firmer footing for long term growth.

Of course, GlaxoSmithKline’s bottom line is forecast to rise by 12% next year. This could improve investor sentiment in the stock and, with it trading on a price to earnings (P/E) ratio of just 17.2, this equates to a very appealing price to earnings growth (PEG) ratio of 1.4. Furthermore, GlaxoSmithKline remains a top notch dividend play, with its yield of 6.1% being among the highest in the FTSE 100, thereby making the potential for impressive total returns relatively high.

Meanwhile, GlaxoSmithKline remains a very defensive stock. Certainly, by its very nature it will endure challenging periods when a loss of patents on blockbuster drugs is not neatly matched by the emergence of new, key treatments. However, its cycle is less closely aligned to that of the economic cycle than for most of its FTSE 100 peers, thereby making it a great investment to own during difficult periods for the wider market.

So, while its shares have disappointed in recent years, for example falling by 12% in the last ten years, it appears to be one of the most enticing long-term opportunities in the FTSE 100.

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Peter Stephens owns shares of GlaxoSmithKline. 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.