Interactive Investor

GlaxoSmithKline in free-fall

23rd July 2014 16:22

Lee Wild from interactive investor

GlaxoSmithKline, rather than play the part of ugly sister to prettier rivals Shire and AstraZeneca, struck its own mega asset-swap deal with Novartis in the spring. But poor second-quarter numbers are turning heads for all the wrong reasons, and at first glance Glaxo looks to be in trouble.

Down 6%, the drug giant's share price has plunged through technical support at around 1,540p to its lowest since early 2013. And while the prospective dividend yield of 5% looks attractive, growth prospects look anaemic.

A strong pound is certainly no beauty spot. Three-month sales fell 13% to £5.6 billion, missing consensus forecasts by about 4%, but earnings per share (EPS) were 12% adrift of estimates at just 19.1p. Even if currency fluctuations are stripped out, the figures are horrible.

Guidance has suffered, too. Glaxo now expects full-year EPS to be no better than last year compared with previous forecasts for 4-8% growth at constant exchange rates. And the impact of sterling's strength on free cash flow will likely prevent further share buybacks for at least the rest of 2014.

"Although sales of flagship drug Advair were broadly in-line, the two new respiratory drugs, Breo/Relvar and Anoro, undershot our seemingly-conservative expectations and only the new HIV drug Tivicay is performing ahead of forecasts," explains Deutsche Bank.

Progress on the incredibly complex deal with Novartis is encouraging, however, and the whole thing should complete in the middle of next year. When it does, the vaccines and consumer healthcare businesses should generate about half of group sales and consistently generate mid-single digit sales.

Deutsche now expects a sharp fall in annual revenue to £23.3 billion and has downgraded forecasts for underlying EPS to 93.9p. Yes, the ongoing inquiry into allegations of misconduct in China and elsewhere is a worry, but at 1,455p, Glaxo shares trade on a reasonably modest forward price/earnings ratio of 15, and the dividend looks too good to miss.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.