Key Investment Highlights
 

1. The group has ownership in ViiV Healthcare and Stiefel dermatology. Both companies have decent growth potential and offer world-class products and services.

2. Delivered strong revenue growth with decent operational performance for the current period.

3. GSK has world-class Consumer Healthcare & Pharmaceutical products and are available in more than 130 regions across the globe.

4. The operations of the group are driven by scientific innovation and bring the next generation of vaccines and medicines for its patients, which can transform the entire healthcare sector.

5. The group has collaborated with Sanofi, Vir Biotechnology, Xiamen University and Innovax to find the potential solutions for Covid-19 pandemic, which can prove to be a gamechanger in the business growth trajectory.

6. The products and services offered by the company are used by individuals of all age groups ranging from infants and children to older adults.

7. The group has changed reporting of is consumer healthcare products and combined its assets of consumer healthcare business with Pfizer healthcare, which will provide greater transparency to the performance.

8. The share price is currently trading near its 52-week low, which makes an excellent opportunity to buy this value stock.
 

GlaxoSmithKline PLC (LON: GSK): Renowned Global Health Care Group with Sound Business Model

GlaxoSmithKline PLC is a multinational healthcare company, which operates with three global businesses that manufacture and conduct research on products related to pharmaceutical, consumer healthcare and vaccines. The group was founded in the year 1715, with an apothecary shop in London and today, it has a workforce of over 99,000 people (including around 12,000 in R&D division) and stands as a constituent of FTSE-100 index. The group has developed 39 new medicines and 15 new vaccines in 2019. The group is a research-based healthcare company and invest heavily in research & developments (R&D). GSK has invested around GBP 4.6 billion in R&D in 2019, which helps them to expand their portfolio and grow sales. Geographically, the group reports its financial from predominantly three locations – United States (US), United Kingdom and Rest of World, while the US contributes the largest amount of turnover. 

(Source: Company Website)

Key Statistics 
 

Long-Term Strategic Priorities Underpinned by their Culture

GSK’s long-term priorities are to create value for shareholder, patients and consumers while building a culture of innovation and incremental performance.

Innovation
 

Progress in 2019:
 

1. The group has delivered a robust sale across key product launches, especially ‘Shingrix’ contributed £1.8 billion in sales.

2. The group also strengthen the pipeline with four priority assets reaching phase II and III and eight filings.

3. GSK has shown an acceleration in its Oncology pipeline by submission for Zejula.

4. The group has also advanced the technology capabilities with partnerships.
 

Priority Objectives for 2020:


1. Continuous innovation to generate sales by leveraging R&D and Supply chain capabilities.

2. Strengthening of the pipeline is expected with six potential approvals.
 

Key Performance Indicators
 

Progress in 2019:

1. The group sales were increased by 10% (on actual exchange rates basis) to GBP 33.8 billion.

2. Free cash flow reached GBP 5.1 billion.

3. Completed the integration of Tesaro successfully to build capabilities in oncology and specialty therapies.

4. The group has also invested in a joint venture (JV) with Pfizer and hiring new talent to enhance capabilities.
 

Priority Objectives for 2020:
 

1. Generating growth and return on investment by controlling spending.

2. Delivering growth and synergies by integration of Consumer Healthcare JV.

3. Enhancing the capabilities in specialty Pharmaceuticals.

4. Focussing on two-year programme for dividing the GSK into two new companies.
 

(Source: Annual Report)

Recent Actions Regarding Drug Development and Liquidity

1. 14^th April 2020: GSK has announced the collaboration with Sanofi, to develop an adjuvanted vaccine for coronavirus disease called Covid-19.

2. 6^th April 2020: The group has also recently collaborated with Vir Biotechnology to find the potential solution for Covid-19, and SARS-CoV-2.

3. 1^st April 2020: GSK has completed the divestment ofHorlicks and nutrition business in India, to Unilever for cash proceeds GBP 397 million.

4. 27^th February 2020: The group has announced a partnership with a consortium to develop a regimen which can treat both drug-resistant and drug-sensitive tuberculosis.
 

Top Shareholders

 

Financial Highlights: Strong Top-line and Bottom-line Performance in FY2019 (31st December 2019)


(Source: Annual Report, Company Website)
 

1. For the financial year ending 31^st December 2019, driven by an increase in the revenue from Consumer Healthcare, Vaccines and Pharmaceuticals businesses for the period, the revenue increased by 10 per cent on AER (Actual exchange rate) basis to GBP 33,754 million as against GBP 30,821 million in FY2018.

2. Driven by the decline in the other operating expenses for the period, the group reported an operating profit of GBP 6,961 million in FY2019 versus an operating profit of GBP 5,483 million in the financial year 2018.

3. The group’s PBT (profit before tax) stood at GBP 6,221 million in FY2019 versus a PBT (profit before tax) of GBP 4,800 million in FY2018, driven by strong growth of revenue and operating profit.

4. The Profit for the year stood at GBP 5,268 million in the financial year 2019 versus a Profit for the year of GBP 4,046 million in FY2018, driven by a lower tax rate for the period.

5. The earnings per share stood at 93.9 pence in FY2019 versus earnings per share of 73.7 pence in FY2018.

 
Financial Ratios - Higher Profitability Margins versus Industry Median
 
 

The reported EBITDA margin, Pretax margin and Net margin reported was 34.6 per cent, 18.4 per cent and 15.6 per cent, respectively, for the financial year 2019, and stood significantly higher than the industry median. Return on equity for the Financial year 2019 stood at 58.9 per cent, which was higher than the industry median of 10.4 per cent. On the liquidity front, GlaxoSmithKline Plc’s current ratio was more than the current ratio of FY2018 period. On leverage front, the debt-equity ratio of the GlaxoSmithKline Plc’s was 2.67x, which was higher as compared to the industry median of 0.33x but stood lower against the last year.

Share Price Performance


Daily Chart as on 16th April 2020, before the market close (Source: Thomson Reuters)

On April 16, 2020, at the time of writing (before the market close, at 10:20 AM GMT), GlaxoSmithKline Plc shares were trading at GBX 1,590.40, up by 1.30 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 1,857.00/GBX 1,328.19.

Bullish Technical Indicator

From the technical standpoint, its shares were trading well above its short-term support level of 20-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further.

Valuation Methodology

Method 1: Price/Earnings Approach (NTM)



To compare GlaxoSmithKline Plc with its peers, Price/Earnings multiple has been used. The peers are Dechra Pharmaceuticals Plc (NTM Price/Earnings was 24.64), Smith & Nephew Plc (NTM Price/Earnings was 18.34), Hikma Pharmaceuticals Plc (NTM Price/Earnings was 17.63), Allergan Plc (NTM Price/Earnings was 10.60) and Bayer AG (NTM Price/Earnings was 7.73). The Average of Price/Earnings (NTM) of the company’s peers was 15.80x (approx.)

Method 2: Price/Cash Flow (NTM) Approach
 


To compare GlaxoSmithKline Plc with its peers, Price/Cash Flow multiple has been used. The peers are Hikma Pharmaceuticals Plc (NTM Price/Cash Flow was 16.14), Smith & Nephew Plc (NTM Price/Cash Flow was 13.42), Amgen Inc (NTM Price/Cash Flow was 12.10), Biogen Inc (NTM Price/Cash Flow was 9.16) and Allergan Plc (NTM Price/Cash Flow was 6.44). The Average of Price/Cash Flow (NTM) of the company’s peers was 11.50x (approx.)

Valuation Metrics


(Source: London Stock Exchange)
 
As on 31st March 2020, the Price to Earnings and EV to EBITDA multiples of the GlaxoSmithKline Plc were around 16.3x and 8.9x, respectively, which were lower as compared to the industry metrics. It reflects, shares are undervalued against its peers. 


(Source: London Stock Exchange)

This analysis is a useful technique to decompose the different drivers of ROE. It can be further examined through three financial metrics which are: net profit margin, asset turnover and financial leverage. This analysis helps to deduce whether the company’s profitability, use of debt or assets that’s driving ROE.

GlaxoSmithKline Plc Vs FTSE-100 Index (1 Year)


(Source: Thomson Reuters)

In the last year, GlaxoSmithKline Plc share price has delivered 1.89 per cent return as compared to negative 24.69 per cent return of FTSE-100 index, which shows that the stock has outperformed the index during the last year.

Dividend Yield


(Source: Thomson Reuters)

GlaxoSmithKline Plc has a dividend yield of 5.1 per cent, which is higher than the industry dividend yield of 3.68 per cent and the sector dividend yield of 3.73 per cent. This needs to be considered in view of the recent correction in the stock price.

Total Return for 5 Years


(Source: Thomson Reuters)

GlaxoSmithKline Plc generated a total return of 28.45 per cent in the last five years versus the total return of FTSE All share of negative 2.68 per cent for five years period.
 
Rapidly Changing Industry Environment

The healthcare industry holds a strong growth potential, yet it is a quite dynamic environment. The global healthcare industry is expected to surge by 3.3% in 2020 as against 2.9% in 2019. However, it is continuously impacted by geopolitical tensions and uncertain trading system, that give a toll on business confidence and expansion plans. In September 2019 (versus year on year 2018), the global pharmaceutical sales increased by 6.4% to GBP 801 billion, while North America holds the maximum share of 48%. On the other hand, China is the second-largest country in terms of pharmaceutical sales, 8.5% of worldwide sales.

The relentless culture of mergers & acquisitions (M&A) and partnerships to bolster pipelines makes the industry competitive. There were several M&A activities even in 2019, especially in the domain of speciality care and oncology. Some major transactions were -  Bristol-Myers Squibb acquired Celgene and AbbVie took-over Allergan.

The demographic factors are also likely to surge the demand for both therapeutic healthcare and preventive products. As the world’s population grows (8.5 billion by 2030), with a rising ageing population (the proportion of population above the age 60 is projected to nearly double between 2015 and 2050) and urbanization, the healthcare sector is also likely to grow.

GSK’s strategy is to tap the maximum opportunities by leveraging its robust R&D capabilities while mitigating the potential risk of a rapidly changing environment.

Growth Prospects and Risk Assessment

The company keeps on launching new platforms and upgrade the old products and services to become one of the market leaders in the healthcare market. There has been a strong demand for its existing as well as newly launched products in the market. The company, through its wide-ranging scope, had accelerated growth organically and through acquisitions. The group is exposed to the effects of political and economic risks. Global political uncertainty regarding trade policy also poses a risk for the group, including protectionist measures and regulation or legislation in local markets. The Group’s business could have a negative impact from the Coronavirus outbreak.

Business Outlook Scenario

The company has shown an increase in financial performance in the financial year 2019. Both the top-line and the bottom-line performance accelerated with improved profitability margins for the period. The group is the largest vaccines company on a revenue basis. Given this industry backdrop, GSK has developed a strong pipeline of opportunity from its producing assets and is making an investment in those assets to fetch higher returns in the long-term.

The group has a wide range of tools and applications to support research related to the Coronavirus and is working in combination with multiple organisations, which can prove to be a gamechanger in the near term. The company’s new guidance reflects operating performance in the financial year 2019, a lower anticipated effective tax rate for the year, and increased investments in R&D and priority assets.

In the FY2019 the company maintained the dividend per share at the existing level of 80 pence. In the financial year 2019, the company had made further good progress, with sales growth across all three segments. In the current period, the company has maintained to reinforce the pipeline and has advanced assets in Respiratory, HIV and, Oncology. The group remained confident about its management team and business model to face the uncertainty created due to Covid-19 outbreak.

Over the course of 3 years (FY16 - FY19), the company’s revenue surged from GBP 27,889 million in FY16 to GBP 33,754 million in FY19. Compounded annual growth rate (CAGR) stood at 6.57 per cent.

Based on the decent prospects and support from the valuation as done using the above two methods, we have given a “BUY” recommendation at the closing price of GBX 1,570 (as on 15^th April 2020), with lower-double digit upside potential based on 15.80x Price/Earnings (approx.) on FY20E earnings per share (approx.) and 11.50x NTM Price/Cash flow (approx.) on FY20E cash flow per share (approx.).
 
*All forecasted figures and Peer information have been taken from Thomson Reuters.

* The “BUY” recommendation given in the report is also valid for the current price as on 16th April 2020.

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