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Can Glaxo's [GSK] share price outpace the FTSE 100 again in 2019?

GlaxoSmithKline’s (GSK) stock price was one of 2018’s best performers. Delivering a 16.5% return on investment, the stock was the fourth best performer on the FTSE 100, edging rival AstraZeneca (AZN) into fifth place. This is in marked contrast to the wider index which nursed a 12.5% drop in value last year as macroeconomic events ground-down investor confidence.

Delivering this shot of adrenalin has been GSK’s refocus on its pharmaceutical business and heightened M&A activity. Investors will now be looking to see if this change in strategy will pay off in 2019.

 

How has GSK’s share price performed recently?

Shares are up around 3% since the start of year, closing Friday’s session at 1525.80. Still, the stock is not totally immune from volatility and took a 12% tumble following underwhelming Q3 earnings results.

Q3 saw £8.1bn in sales, a 6% jump on the previous year, and adjusted earnings per share at 35.5p. However, shareholders were concerned that a potential bid to buy Pfizer’s health business might put dividends at risk. These fears seem to have been short-lived with the stock clawing back losses to trade near its pre-announcement level.Powered by CMC Markets, as at 17 January 2019

 

Investors buy into shake up at the top

When CEO Emma Walmsley took charge in 2017, the pharmaceutical giant had its detractors. Chief among these was investment supremo Neil Woodford who dumped his entire stock that year, worth £1.2bn, over the drug maker’s seemingly risk-averse strategy.

Walmsley seems to have listened and has spear-headed a radical shakeup that sees the R&D budget concentrated on developing fewer, more profitable drugs and disinvestment in underperforming areas.

“We need to place some smart bets, take some risks, and I think when we do that we'll be bringing sustainable shareholder growth and more benefits for more patients around the world," Walmsley told CNBC.

Shareholders seem to be buying into the change in direction with the share price up 7% at the end of 2018.

“We need to place some smart bets, take some risks, and I think when we do that we'll be bringing sustainable shareholder growth and more benefits for more patients around the world” - GSK CEO Emma Walmsley

 

Partnership with Pfizer

Perhaps Walmsley’s boldest decision has been to spin-off GSK’s healthcare business in a joint venture with US rival Pfizer. Announced in December, the move will create the world’s biggest consumer healthcare brand, occupying 7.3% of the market - well head of rivals like Johnson & Johnson - and boasting annual sales of almost £10bn.

More importantly, GSK can load debt onto the new company at the point of separation. This will free up funds to put into its strategically important pharmaceutical business and the time necessary to deliver a product pipeline that can effectively compete with competitors.

 

GSK extends cancer therapy pipeline

So far, 2019 has seen some of the pharmaceutical industry’s biggest players extend their presence in cancer therapies. US-based Bristol-Myers Squibb Co announced a $74bn deal for Celgene Corp., while Eli Lilly has made a $8bn offer for Loxo Onocology Inc.

GSK itself shelled out $5.1bn late last year for cancer-drug maker Tesaro in a purchase that almost doubles the size of its immuno-oncology pipeline. However, the acquisition has been met with resistance from Tesaro shareholders who recently launched a class-action lawsuit to halt the acquisition.

$5.1billion

Value of GSK's Tesaro acquisition

GSK’s own in-house pipeline of oncology drugs has also been ramped up. In the next few years, the drug maker will release several new treatments, including a BCMA antibody-drug that Evaluate Pharma reckons could be a blockbuster.

 

Is there opportunity in GSK’s share price?

Clever deal-making is no substitute for getting products to market. GSK’s acquisitions show that it’s acutely aware of this, but also adds pressure on operating costs and R&D budgets to sustain a delivery pipeline. Still, Goldman Sachs has confidence in the company, pinning a 1900 target on the share price.

 

Market cap£72.67bn
PE Ratio (TTM)39.40
EPS (TTM)37.50

GSK stock vitals, Yahoo finance, as at 17 January 2019

 

For investors looking for an income generating stock, GSK is also one of the best dividend payers on the FTSE 100. Promisingly, it has confirmed that it expects to pay out 80p a share in 2019. Yet the stock isn’t cheap and carries a PE ratio of 41.32.

Investors will need to weigh this against the mid- to long-term potential of GSK’s recent strategic moves. A key deciding factor will be the release of Q4 and full-year results on 6 February.

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