What to Do With GSK

Dear Mr. Berko: My husband has been diagnosed with COPD, and I can’t imagine a more frightening medical disorder. He tells me that it feels as if there were an elephant sitting on his chest. His physician prescribed Advair, which has been a blessing and works like a miracle. We were so impressed that we also bought 200 shares of GlaxoSmithKline, which makes this inhaler. We paid $54 for each share in the summer of 2014. The stock seemed to fall in value right after we bought it, and it fell all the way to $37. Though the drug works very well for my husband, the stock has been very disappointing. Our stockbroker recommended that we sell the stock and use the proceeds to purchase Pfizer, which he says has better short- and long-term potential than GlaxoSmithKline. We would appreciate your comments. — PA, Buffalo, N.Y.
Dear PA: Though I think your broker’s Pfizer recommendation has uncommon merit, I think his recommendation to sell GlaxoSmithKline and use the proceeds to purchase Pfizer is a blatant commission ploy. I like his Pfizer recommendation but strongly condemn his “sell” recommendation on GlaxoSmithKline.
Having chronic obstructive pulmonary disease, or COPD, certainly isn’t a bowl of cherries. But actually, one of the reasons the earnings and stock performance of GlaxoSmithKline (GSK-$42) have been rather stinky recently is GSK’s Advair. Advair, previously an $8 billion-revenue blockbuster drug for the treatment of COPD and asthma, lost its patent in 2016. Advair revenues plunged to $4.4 billion, causing GSK to trade at $37, its lowest price since 2009. Although Advair is still GSK’s top-performing drug (16 percent of 2016 revenues), the consensus suggests that sales will continue to decline this year and in 2018.
Through a multimillion-dollar advertising fund, the good news is that GSK’s next-generation long-lasting asthma and COPD therapies, Breo and Anoro, topped $1 billion in revenues in 2016. The uptake, though, of Breo and Anoro has lagged for two reasons: 1) Insurance coverage of these more expensive drugs has been slow to respond. 2) It’s usually difficult to persuade physicians to switch to new products. But GSK’s management expects these two drugs to bring in $1.7 billion in 2017. Importantly, the loss in revenue from the introduction of generic competition for Advair has been dwarfed by Breo and Anoro and GSK’s well-received HIV drugs, Tivicay and Triumeq, which together should generate $3.4 billion in revenues this year. It appears that management has absorbed the brunt of the generic advance on Advair, and resultantly GSK seems to be a splendid capital gains recommendation, with a $60 price target by 2018.
This $38 billion research-based global company with 102,000 employees has a broad range of innovative products in three primary areas: pharmaceuticals, vaccines and health care. Its HIV business has been impressive, with worldwide sales growing 12 percent last year. Its antiviral, antibacterial, urogenital, immunomodulatory and metabolic drugs have also been standouts in worldwide sales and, in the coming few years, could push revenues to $44 billion and net profit margins over 19 percent. Mutual fund organizations Fidelity, T. Rowe Price and Vanguard and institutions such as State Street, Wells Fargo and Morgan Stanley, which own over 100 million shares, seem to agree. So do Value Line, Argus Research, Thomson Reuters, Bank of America and Market Edge, each of which has a “buy” recommendation on GSK.
Meanwhile, the expected $2.18 dividend for 2017, yielding 5.2 percent, is a key draw for long-term shareholders. I don’t see significant dividend growth in the near future, but I’m impressed with comments by Value Line’s Michael Ratty on GSK: “Based upon our system, GSK is currently one of the more attractive year ahead growth plays in the pharmaceutical space. An above average dividend yield and strong grades for Safety (1) and Stock Price Stability (95) further enhance near term investment appeal.” And I agree. Investors can be very comfortable earning a 5.2 percent dividend from GlaxoSmithKline for several years while waiting for its shares to trade 20 points higher, in the $60s.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected]. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
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