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Are GlaxoSmithKline shares under-valued?

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GlaxoSmithKline (LSE: GSK) has been a little late to the diversification party, but with the planned spin-out of its consumer health division this year, and a couple of impactful launches in the market, the prospects for this currently underperforming stock are good – and probably better than its share price right now suggests.

Ostensibly, GlaxoSmithKline’s broad geographic footprint – and an operating model that includes pharmaceuticals, consumer health, and vaccines – would appear to give this Big Pharma player the sturdiness to weather a multitude of storms. But at a time when the prevailing trend has been a move towards pure-play pharmaceuticals and the higher margins this commands, GlaxoSmithKline appears to be somewhat behind the times… an impression the company is seeking to rectify with the planned spin-out of the consumer health joint venture it co-owns with Pfizer in 2021.

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GlaxoSmithKline’s dividend has been held flat for several years, its shares yielding a return of 5-6%, which has been very reasonable for a company of its size. However, GlaxoSmithKline recently indicated a dividend reduction to finance pipeline development – essentially to buy in early stage assets. While GlaxoSmithKline has talked up its current pipeline – the 20 or so products in development, half of which with blockbuster potential – many will not come to fruition until 2026. Inorganic growth is therefore an important means of bulking up on pipeline opportunities for the next few years to provide something of a revenue bridge to the outer years when GlaxoSmithKline’s home-grown assets hit the market.

In the meantime, GlaxoSmithKline is capitalising on its key strengths, namely leadership in respiratory and HIV, and making waves with recent landmark approvals. In September 2020, GlaxoSmithKline received FDA approval for Trelegy Ellipta, the first once-daily, three-in-one drug to treat both asthma and COPD, beating AstraZeneca to the post. And Nucala – GlaxoSmithKline’s injectable biologic treatment for asthma – was the first to be approved for use in a rare eosinophil driven disease. In January 2021, GlaxoSmithKline secured US approval for the first injectable long-acting treatment for HIV. Previous to this, GlaxoSmithKline had another first, with the April 2019 FDA approval of Dovato, the first complete two-drug regimen to be approved in the US for the treatment of HIV.

On balance, GlaxoSmithKline’s near-term prospects look great, with a convincing in-market presence, and imminent splintering0off of the consumer health division sure to improve the operating margin of the pure-play Pharma that’s left. Further, GlaxoSmithKline’s vaccine and infectious disease experience will undoubtedly stand the company in good stead at a time when keeping up with the latest Covid-19 mutations has spawned a sub-industry in the vaccine sector. It’s the long term where the greatest uncertainty lies for GlaxoSmithKline shares, and despite positivity around the company’s pipeline, it is perhaps too heavily loaded to the outer years for my comfort.

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Pam Narang has no position in any company mentioned. The Motley Fool UK 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.