GlaxoSmithKline plc Ordinary 25p (GSK)

Company overview

Core activities include the creation, discovery, development, manufacture and marketing of pharmaceutical products and consumer health-related products. GSK leads the world in four major therapeutic areas - anti-infectives, central nervous system (CNS), respiratory and gastro-intestinal/metabolic. In addition, it is a leader in the important area of vaccines and has a growing portfolio of oncology products. The group employs over 100,000 employees worldwide.

HL Update (23 July 2008)

The group’s recent second quarter results (23July08), whilst broadly meeting analysts’ estimates, continued in a similar vein to recent quarters. Although sales of the group’s asthma drugs (+6pc) and vaccines (+34pc) progressed, the decline in sales for the company’s major diabetes drug Avandia remained worrying (-46pc overall and -54pc in the USA). Furthermore, the Consumer Healthcare division, which has remained a positive counterweight to the declining Pharmaceutical division, also disappointed. Sales of the group’s smoking cessation products suffered growing competition, falling by 15pc and pressured by retailers’ own label products.

On the positive, new management’s future strategy policy appears to offer an injection of entrepreneurship into the drug development process. Small teams of scientists are to compete for group funds, with larger incentives being offered for eventual success. Furthermore, the share buy-back scheme has effectively been extended, the shares continue to offer some element of defensiveness in uncertain times and the dividend yield remains supportive. In addition, some investor pressure remains for the group to eventually de-merge its pharmaceutical and healthcare divisions. On balance, market consensus remains neutral in tone.

Previous HL Update (23 April 2008)

The group’s recent first quarter results (23April) broadly met analysts’ estimates as sales rose by 2pc to £5.68 billion, but operating profits fell by 5pc to £2.04 billion. The downturn in sales of the group’s diabetes drug, Avandia, continued to weigh on the company, although management did note their belief that sales had stabilized in recent weeks. Furthermore, growth in both the group’s asthma drug Seretide/Advair (sales +10pc) and vaccine sales (+10pc) helped to counterbalance the downturn in Avandia. In addition, the group’s Consumer Healthcare business continued to enjoy sales progress (+8pc), cementing its performance over recent years.

Outside of the results, the group also announced a US acquisition, with the £362m takeover of Sirtris. The acquisition is expected to enhance significantly the group’s metabolic, neurology, immunology and inflammation research efforts by establishing a presence in the field of sirtuins, a recently-discovered class of enzymes that are believed to be involved in the ageing process. At the current time, market consensus opinion is neutral.

HL Comment (7 February 2008)

Europe’s largest drug maker highlights on its website that of its 100,000 employees, around 40,000 are in sales and marketing. This represents the largest sales force in the industry. Investors’ major concern in recent years is that this sales force would be working ever harder to sell a reducing number of patented best selling drugs as generic manufacturers commence production of drugs reaching their patent expiry and new blockbuster sellers fail to materialise from the group’s extensive Research and Development division.

Unfortunately, recent medical concerns over the side effects of using the group’s diabetes drug Avandia continue to drag on the company - the diabetes treatment is GSK's second biggest selling product. Recent fourth quarter/full year results (07Feb08) saw full year operating profits down 3pc to £7.59 billion, as a loss of sales in the key product over the fourth continued to impact. Furthermore, given no obvious sign of improvement, management lowered its guidance for 2008 earnings, now expecting a single digit decline against analyst forecasts ranging between a slight increase to no change. In addition, the group is also due to file a response to the US Federal Drug Administration's recent request for more information on the company's Cervarix cancer vaccine, due by the end of the second quarter 2008. On a more positive note, the group’s Consumer Healthcare division - which includes such brands as Ribena, Horlicks and Nicorette - delivered a positive full year (2007) performance, with sales up 14pc to £3.5 billion. Furthermore, the dividend over the course of 2007 was raised by 10pc, whilst around £6 billion is expected to be spent repurchasing group shares over the course of 2008.

Overall, investor concerns focus on the rapid deterioration in a leading group drug seller (Avandia), future losses of drug patents and the slow speed of new potential blockbuster drugs being developed in order to replace the existing pipeline. As for the positives, strong cashflows underwrite a significant share buy-back scheme, the pace of new drug developments does appear to have improved over recent months and the consumer healthcare division remains supportive. On balance, market consensus opinion is currently neutral in tone.

All yield figures are variable and not guaranteed.

Fundamental Data

* Prior to 31st December 2005, figures were stated under UK Generally Accepted Accounting Principles (GAAP). Recent figures stated under International Financial Reporting Standards (IFRS).