I reckon GlaxoSmithKline (LSE: GSK) is a great stock to hold in a long-term portfolio because the pharmaceutical industry is known for its defensive characteristics, but read on for an idea that could complement the stock in your portfolio.
It’s well known that the pharmaceutical giant has been challenged in recent years by many of its best-selling treatments running out of time on their patent protection. The firm’s five-year record on earnings shows a steady decline and a bounce-back during 2016, but during the period the dividend held flat. Looking forward, City analysts following it predict 8% growth in earnings in 2017 and 3% during 2018. It looks like the firm’s operations are recovering, driven by ongoing R&D progress with a steady flow of new blood from the development pipeline.
Maybe GlaxoSmithKline will score big with a new patent-protected blockbuster in the future. In the meantime, steady cash inflow keeps the firm looking attractive. At today’s share price of 1,526p, you can pick up some of the shares on a forward price-to-earnings (P/E) ratio a little over 13 for 2018. And the forward dividend yield runs just above 5% with those forward earnings expected to cover the payout around 1.4 times.
This is a defensive, dividend-paying stalwart, but the pharmaceutical sector offers excitement too, and we can get some of it in our portfolios by moving further towards earlier-stage R&D-focused outfits that have yet to generate the gargantuan cash flows of a firm like GlaxoSmithKline. I think there’s a good case for pairing it with a firm such as Summit Therapeutics (LSE: SUMM), which released its interim results today.
The drug discovery and development company is working on therapies for Duchenne muscular dystrophy (DMD) and C. difficile infection (CDI). As with all early-stage drug development firms, the goal is to end up with a marketable product that can go on to generate revenue and profit, but such firms are known for burning cash and raising funds. However, Summit Therapeutics seems to have passed its most-precarious lossmaking stage.
During October 2016, the firm signed up to an exclusive licence and collaboration agreement with Sarepta Therapeutics Inc. Sarepta and Summit will collaborate to develop therapies for patients with DMD and share R&D costs. Summit received $40m up front from Sarepta, which helped stabilise the company’s financial position. The terms of the deal allow for potential future milestone payments to Summit of up to $522m.
A bridge to commercialisation
Summit also has an option to take up rights to the market in Latin America. Assuming that development goes well, it looks like it has a decent bridge to commercialisation in place and a route to market-generated revenues. Meanwhile, development progress is advanced. The firm expects to report results of a proof-of-concept trial for its potential DMD treatment, Ezutromoid in the first quarter of 2018 and to start phase 3 clinical trials with its C. difficile treatment Ridinilazole during the first half of 2018.
I think Summit Therapeutics looks well-placed and is worthy of your research right now. If things continue to go well for the firm, we could end up seeing multiples of the current 185p share price, but if the trials fail, the shares could move a long way in the wrong direction.
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Kevin Godbold does not own any shares in Summit Theraputics or in GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.