GlaxoSmithKline is A Good Play For the Long Haul

Muhammad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

While many analysts view GlaxoSmithKline (NYSE: GSK) in a negative light following the recent $3 billion fine tied to concealing safety issues, I maintain a bullish stance on its long term prospects. My standpoint is inspired by two reasons.

First, lawsuits are commonplace in the pharmaceutical industry, and as such should not stir a lot of alarm. Most of GlaxoSmithKline's competitors, like Pfizer (NYSE: PFE), are currently staging similar battles. Pfizer is facing a lawsuit over Chantix, a drug prescribed to quit smoking. Apparently, the drug allegedly caused a Minnesota  man to commit suicide. Interestingly, Pfizer will not only have to dodge the legal bullet, but it will also have to face off with the SEC following scrutiny over suspicious income reports.

Eli Lilly (NYSE: LLY), another close competitor, had to fork out $1.42 billion back in 2009 following allegations over improper marketing of its anti-psychotic drug Zyprexa. Novartis (NYSE: NVS), on the other hand, has to part with $10.45 million after a lawsuit involving a woman who suffered jaw bone damage after using the drug Zometa. These examples show that lawsuits are a staple in the pharmaceutical industry. GlaxoSmithKline's decision to plead guilty and avert the lengthy and expensive litigation process actually displays tact.

Second, GlaxoSmithKline has doubled its efforts this financial year, especially so after the $3 billion lawsuit. As of now it is making notable amends to make up for the negative publicity generated by the lawsuit. The British pharmaceutical giant is now offering researchers detailed data. While patient data will remain anonymous, GlaxoSmithKline will see to it that it maintains unquestionable levels of transparency in its operations.

In addition to this, I am impressed that the once-troubled pharmaceutical titan managed to restore profitability at the onset of the year. Back in 2010, and during parts of 2011, GlaxoSmithKline was operating well below the break-even point. However, through restructuring and efficient resource usage, the company was able to post profits of $2.05 billion in February, up from losses of $997.8 million a year earlier. Nevertheless, the drug maker reported a profit of $1.80 billion in its latest earnings report, representing a considerable drop from profits of $2.21 billion a year earlier. Although GlaxoSmithKline reported an earnings dip, I am still confident that it has the right strategy to pull through. In addition, this earnings decline was a reflection of a market-wide trend that was brought about by reduced spending in the European market.

Similarly, GlaxoSmithKline CEO Sir Andrew Willy maintained a bullish spirit in the half-year report, citing that the pharmaceutical behemoth would continue narrowing in on growth opportunities. Sir Andrew Willy was keen to state that the management would focus on extending sustained sales growth and improving returns to shareholders. This shows that the stock is a good play for dividend investors that are looking to put their money in low-risk long term investment vehicles.

One particular highlight in the half-year report that caught my attention was the significant progress made in GlaxoSmithKline's late-stage pipeline. Indeed, much of the future growth is expected to come from the late-stage pipeline. In the same breath, GlaxoSmithKline is currently starting a late-stage study of an Asthma drug. This shows that its operations are in accordance with its plans and strategies, signaling overall positive progress.

I am also equally impressed by the fact that GlaxoSmithKline is doing all it can to maintain its huge global footprint as far as offering respiratory medicine is concerned. Being a notable name in the segment, the British heavyweight has gone the extra mile to secure its potent U.S. market. In an overt display of tact and innovation, GlaxoSmithKline is launching the first U.S. inhaler program. The program, which has already spanned across 31 big cities in the U.S., will also recycle inhalers from competitors. This move will undoubtedly change the competitor landscape as far as social responsibility is concerned, something that I believe gives GlaxoSmithKline a huge edge in the current market.

When compared with its competitors, I must admit that competition is overbearing. Not only are GlaxoSmithKline's inner circle of rivals closely spaced, but they are also some of the biggest names in the industry.

The table below gives a more definitive picture of my argument.

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p>GSK</p> </td> <td> </td> <td> <p>NVS</p> </td> <td> <p>PFE</p> </td> </tr> <tr> <td> <p>Market Cap</p> </td> <td> <p>111.33B</p> </td> <td> <p> </p> </td> <td> <p>147.14B</p> </td> <td> <p>189.95B</p> </td> </tr> <tr> <td> <p>Quarterly revenue growth</p> </td> <td> <p>-0.08</p> </td> <td> <p> </p> </td> <td> <p>-0.07</p> </td> <td> <p>-0.19</p> </td> </tr> <tr> <td> <p>Revenue</p> </td> <td> <p>2.77B</p> </td> <td> <p> </p> </td> <td> <p>57.49B</p> </td> <td> <p>62.22B</p> </td> </tr> <tr> <td> <p>Net Income</p> </td> <td> <p>7.96B</p> </td> <td> <p> </p> </td> <td> <p>8.64B</p> </td> <td> <p>9.75B</p> </td> </tr> <tr> <td> <p>EPS</p> </td> <td> <p>3.34</p> </td> <td> <p> </p> </td> <td> <p>3.55</p> </td> <td> <p>1.33</p> </td> </tr> <tr> <td> <p>P/E</p> </td> <td> <p>13.59</p> </td> <td> <p> </p> </td> <td> <p>17.15</p> </td> <td> <p>19.06</p> </td> </tr> </tbody> </table>

Source: Yahoo! finance

As detailed in the table, it is clearly evident that GlaxoSmithKline is the smallest of the competitors. Despite having the least revenue, it manages to convert most of it into income, signaling efficiency. Similarly, stalled revenue growth appears to have cut across the whole industry. As such, GlaxoSmithKline’s flat top line should not outweigh its strengths. I believe it is a good buy for the long haul.


muhammadbazil has no positions in the stocks mentioned above. The Motley Fool owns shares of GlaxoSmithKline. Motley Fool newsletter services recommend GlaxoSmithKline. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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