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Here’s why the GSK share price could be set to beat the FTSE 100

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Shares in GlaxoSmithKline (LSE: GSK) have put in a pretty unimpressive five years, dropping 12% — soundly beaten even by the FTSE 100’s lacklustre 15% rise.

But since the start of 2018, we’ve seen a 14% gain while the Footsie has remained flat, so are we set for a resurgence? If Wednesday’s second-quarter results are indicative of a new trend of earnings growth, then yes, I think we might finally be seeing the benefits of the investment the company has made in its drugs development pipeline.

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We actually have already had a couple of years of EPS growth, but the flat couple of years expected ahead of us look to be holding investors back from their previous decades-long confidence in the company.

Narrow portfolio?

My colleague Harvey Jones has aired a warning over the dependence on a small number of key products, and the risk with that has been highlighted recently by the troubles facing Indivior — its one major product is already under threat from a generic drug manufacturer.

But Glaxo has some impressive offerings in addition to its current star HIV treatments on offer, though an update on FDA examination of its mepolizumab COPD offering on Thursday won’t have done it any favours. In short, though the vote went in favour of the safety of the drug, there was apparently not sufficient evidence of efficacy when used as an add-on treatment to inhaled corticosteroid-based products.

That doesn’t mean it’s dead, and further investigation into the population of sufferers who could benefit from the treatment might still lead to progress.

There also still seems to be some negative sentiment towards old-style pharmaceuticals giants from people who see nimble new biotechnology as being set to eclipse the blockbuster drugs model — especially the promise offered by genetics-based technology.

New technology

But I think that’s missing a very key point, and that’s that the drugs approval process is still a massively expensive enterprise. Upcoming new companies with promising ideas and interesting early results just don’t have the billions at their disposal for financing the process — and they rarely expect to go the whole way themselves anyway.

GlaxoSmithKline, of course, does have the cash, and that’s a key attraction of its partnership with 23andMe, which does genetic testing and analysis. 23andMe has built up a sizeable database of human genetic profiles. To a significant extent, that’s been driven by the benefits that genetic testing can offer to the increasingly popular genealogy market — find your ancestors and identify your possible genetic illnesses too.

Glaxo’s $300m investment in the firm looks like a canny move to me, and it could provide a very valuable set of data to contribute to computer modelling of the mechanisms of genetic conditions and how target drugs might work.

The world’s big pharmaceuticals companies are surely far more likely to benefit from new technology than to be threatened by it.

Buy or sell?

Even though Glaxo’s 11% share price loss over five years is disappointing, investors have also been enjoying dividends of 5%-6% per year. And that actually makes for a reasonable overall return, especially for those who reinvested their dividends when the share price was depressed.

A P/E close to the long-term FTSE 100 average of around 14, with forecast dividend yields of 5.2%? Looks good to me.

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Alan Oscroft has no position in any of the shares mentioned. 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.