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Why I believe the GSK share price could soon return to 1,700p

A couple of times over the past few years, the GlaxoSmithKline (LSE: GSK) share price has briefly peered above the 1,700p barrier. But it’s never hung on for long. Can the shares again climb above that benchmark and stay there? I think so.

Glaxo’s troubles stem from losing key patent protections on some blockbuster drugs a few years ago while facing increased competition from generic manufacturers. It’s a problem it shared with fellow pharma giant AstraZeneca, which recruited new boss Pascal Soriot whose radical strategy has refocused that company on its core strengths.

Turnaround

Glaxo’s turnaround has perhaps been a little less high-profile, but it’s been delivering the goods, and we’ve had three years of rising earnings per share since 2016. But the share price recovery looks to have been stalled by a forecast EPS dip of 8% this year before a modest regain of 5% next year. That’s not the sustained growth I think investors need to justify a new share price growth phase.

But the drug development timeline is a long one and involves considerable expense. It’s an endeavour with potentially very long-term rewards too, and I think a number of factors are building to deliver a new golden period for GlaxoSmithKline.

The first is that the developed world is looking more and more like an old folks’ home. In that, I mean longevity is increasing, age-related ailments are rising (and that include biggies like cancer, with lengthening lifetimes raising the overall probabilities), and there’s an increasingly lucrative market for successful drugs.

The other key, ongoing, development is that Glaxo’s investment in its production pipeline is increasingly paying off. A look over the company’s news releases shows a long list of key development milestones being hit.

HIV

One very smart move, in my opinion, was Glaxo’s partnering with US drugs giant Pfizer in the battle against HIV. The two companies formed joint venture ViiV Healthcare in 2009, pooling their HIV research and development. I think it makes a lot of sense, especially when targeting the US healthcare market, to form a partnership than go head to head in competition.

In early April, the US Food and Drug Administration (FDA) bestowed its approval on Dovato, a single-tablet, two-drug combination of dolutegravir and lamivudine for the treatment of HIV-1 in adults. The dual-drug combination is also under review by the European Medicines Agency (EMA) and by authorities in Canada, Australia, Switzerland, and South Africa — and, just a few days ago, the EMA’s Committee for Medicinal Products for Human Use (CHMP) issued a “Positive Opinion recommending marketing authorisation for Dovato.”

Drag

February’s full-year results statement showed impressive sales increases across the board for Glaxo’s newest commercial products, though the continued effect of generic competition continues to exert a drag on sales of older drugs. The expected 8% EPS drop this year is in large part due to the approval of a generic competitor to Advair in the US.

But that drag will end and, as GlaxoSmithKline’s sales come more and more to focus on new drugs, I can see serious EPS growth becoming established. I rate Glaxo as a long-term buy.

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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. The Motley Fool UK has recommended AstraZeneca. 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.