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GSK’s share price climbs after strategy overhaul sees jump in profits

GlaxoSmithKline’s [GSK] share price went on a rollercoaster last Wednesday, the day of the company's full year and fourth quarter earnings announcment, having posted estimate-beating results for 2018. The stock dropped as much as 2% in early trading hours, before rallying 3.75% to a two-month high of 1,547.80p in the afternoon.

Revenues for the year totaled £30.8bn, boosted by £748m in sales from the company’s shingles vaccine Shingrix in the last quarter. While the company saw a 34% jump to £5.48bn in operating profits for the year, its guidance for 2019’s profits was lowered from 5% to 9% due to acquisition charges and competitive pressures from generic drugs in the US.Powered by CMC Markets, as at 13 February 2019

 

The pharmaceutical giant announced a string of tie-ups and disposals over the past year, as it seeks to grow its international presence in the US and, post-Brexit, in Europe.

Plans include a tie-up in consumer healthcare with Pfizer, the sale of the nutrition business to Unilever, the acquisition of American drug maker Tesaro, and a $4.2bn joint venture with Germany’s Merck KGaA, which spurred a 2.6% rally when they announced the news early last week.

GSK said profits for the year would be dented by the hefty $5.1bn acquisition of Tesaro – which is to be funded from cash resources – and decreasing sales of its asthma drug Advair due to Dutch pharmaceutical giant Mylan launching its own version of the drug, which generated sales of almost £2.5bn in 2018. Nevertheless, GSK still expects to pay 0.80p in full-year dividends, the same as 2018.

 

Market cap£76.09bn
PE ratio (TTM)21.22
EPS (TTM)72.90

GSK stock vitals, Yahoo finance, as at 13 February 2019

 

What next?

GSK is betting on oncology for future growth, both through the Merck KGaA and Tesaro deals and a pipeline of 16 new cancer-focused drugs. Chief executive Emma Walmsley said that oncology assets have already doubled since July, and expects three new cancer drugs to be launched within the next two years.

“The Merck alliance is a perfect example of the kind of thing that we shall continue to look for,” Walmsley said during the earnings call.
Brexit poses a challenge for the British company, which saw almost £8bn of its revenues come from Europe in 2018. Wednesday’s earnings did not mention the UK-EU divorce directly, but a section on the company’s website says Brexit-related measures could cost it up to £70m over the next two to three years, and £50m for every year afterwards, owing to duties and administrative expenses. 
However, GSK says it does not see Britain’s departure from the EU impacting its business in the long-term.

“The Merck alliance is a perfect example of the kind of thing that we shall continue to look for” - GSK Chief Executive Emma Walmsley

Analysts at Jefferies said the 2019 profit outlook would still be “well-received” by investors, considering fears of a much higher decline were flattened.

Deutsche Bank, which has a 1,520p target on the stock, reiterated its “hold” rating. A note from UBS on 25 January gave it a “buy” rating and set a 1,700p target.

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