GlaxoSmithkline (LSE: GSK) has suffered four years of falling earnings as, along with FTSE 100 competitor AstraZeneca, it faced the loss of patents on some key drugs and a resulting increase in competition from generic alternatives.
It was always going to take a few years for earnings growth to resume, and at the end of 2015, chief executive Sir Andrew Witty told us that 2016 would be the year in which the firm expected “EPS percentage growth to reach double-digits“.
Strong second quarter
An impressive second quarter has now helped boost first-half revenue to £12,761m, up 6% at constant exchange rates (CER), with core operating profit up 14% to £3,390m and core EPS up 12% to 44.3p (again at CER). Including one-off restructuring charges and the effect of the falling pound on the valuation of some liabilities, that drops operating profit to £572m and produces a resulting loss per share of 3.2p. But the company now expects full-year core EPS to grow by 11-12% at CER, at the upper end of previous guidance.
The quarter will pay a dividend of 19p per share, with shareholders still on for 80p per share for the full year and for 2017. With the shares up 2.3% to 1,705p at the time of writing, that would provide yields of 4.7%, which should be adequately covered by earnings.
As evidence of the success of Glaxo’s turnaround, Sir Andrew pointed to “growth in new product sales, continued cost control and delivery of restructuring and transaction benefits“.
Pipeline
The long-term success of GlaxoSmithKline will rely on the successful beefing up of its development pipeline, hopefully generating years-long streams of income from new generations of patented drugs.
In the half, the company obtained EU approval for Strimvelis, the first gene therapy available for the immune deficiency condition ADA-SCID, and there are four “significant filings” planned for the second half — treatments for COPD, shingles, lupus and rheumatoid arthritis.
Phase II trials for cabotegravir, for the treatment and prevention of HIV, should commence this year, and progress on the firm’s newest respiratory medicines is apparently accelerating.
With new pharmaceuticals and vaccines sales in the second quarter coming in at more than £1bn (compared to £446m in last year’s Q2), and HIV treatments performing “strongly”, Glaxo’s rejuvenated pipeline does seem to be nicely feeding through to the bottom line.
The Brexit effect
Glaxo shares have gained 23% since 17 June, with the post-Brexit ‘flight to safety’ adding a bit of impetus. And with the company also today announcing plans to invest £275m in the UK to expand three of its manufacturing sites, leaving the EU should cause no worries for Glaxo shareholders. In fact, Sir Andrew said that “the underlying attractiveness in terms of the UK’s economic strengths and its fiscal environment haven’t changed.“
GlaxoSmithKline’s prospective full-year P/E multiple now stands at 18.7, dropping a little to 17.7 based on 2017 forecasts. The likely dividend yield is now a bit lower, after last year’s 80p per share yielded 5.8% on the as-then-lower share price. But that’s still a nice amount of cash, and now that a return to earnings growth is all but confirmed for this year, I’d say we’re still looking at an attractive valuation.
I’ve always seen GlaxoSmithKline as one of the world’s most solid long-term investments, and I see no reason to change that opinion today.
