GlaxoSmithKline PLC

GlaxoSmithKline Plc (GSK) is a healthcare company, which focuses on the manufacture, commercialisation, and development of pharmaceuticals vaccines and consumer healthcare products. It offers drugs for the treatment of cancer, HIV, anti-viral, metabolic, anti-bacterial, rare diseases, cardiovascular and urogenital, immuno-inflammation, respiratory, central nervous system (CNS), and dermatology. The company offers over-the-counter (OTC) products for pain, relief, nutrition, skin health, oral health, and gastrointestinal disorders.

Recent News
On 7^th June 2019, the company announced that the US FDA (Food and Drug Administration) has permitted two new methods for administering Nucala (mepolizumab). Nucala is the primary respiratory biologic to be accepted for administration via an autoinjector and the first anti-IL5 biologic to be licensed in the US for at-home administration.

On 4^th June 2019, the company announced that the EMA (European Medicines Agency's) CHMP (Committee for Medicinal Products for Human Use) has issued a positive view recommending two new methods for administering Nucala to patients with severe eosinophilic asthma: a pre-filled safety and a pre-filled pen syringe, to be occupied once every four weeks.  

On 2^nd May 2019, GlaxoSmithKline plc and Innoviva, Inc. announced important results from the pivotal phase III CAPTAIN study of once-daily single inhaler triple therapy Trelegy Ellipta as compared to Relvar/Breo Ellipta, in the treatment of patients living with uncontrolled asthma.

Q1 FY2019 Trading Update (as on 1^st May 2019)
The company’s pharmaceuticals sales increased by 4 per cent (AER) to £4.2 billion, while on a CER basis, sales increased by 2 per cent.  In Vaccines, sales surged by 23 per cent (AER) to £1.5 billion, while on CER basis, sales increased by 20 per cent. In the Consumer Healthcare business, sales stood at £2.0 billion.

Total Group operating margin stood at 18.6 per cent.  Adjusted Group operating margin increased by 1.6 per cent (AER) to 28.2 per cent, due to the benefits from solid sales growth and phasing of R&D.

Total EPS increased by 50 per cent (AER) to 16.8 pence as compared with the corresponding period of the last year, while on a CER basis, EPS rose by +42 per cent. Adjusted EPS climbed to 30.1 pence against the previous year of same period data, due to the strong operating performance, reduction in minority share, continued financial efficiencies, and a one-off advantage to associates.

The company’s net cash flow from operations was £663 million in Q1 FY19.  Free cash flow stood at £165 million.

Financial Highlights (FY2018, £ million)

(Source: 2018 Full Year Results, Company Website)

The company reported revenue of £30,821 million for the year ending December 2018 as compared to £30,186 million in 2017 for the same period. There was an increase of 2.10 per cent in revenue of the company due to a growth in HIV revenue, new respiratory products, influenza vaccines, Hepatitisde vaccines, Oral health, Wellness and increase in sales of Shingrix in the US market.

The company reported a gross profit of £20,580 million, up by 4% compared to its FY17 gross profit. Operating profit and profit before tax grew significantly in FY18 and were up by 34.16% and 36.17% respectively as compared to its FY17 numbers. Net Profit (attributed to Shareholders) in FY18 grew by 136 per cent at £3,623 million.

Share Price Performance

Daily Chart as at June-24-19, before the market closed (Source: Thomson Reuters) 

On 24th June 2019, at the time of writing (before the market close, GMT 12:35 PM), GSK shares were trading at GBX 1,579 and increased by 0.165 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 1,648.80/GBX 1,408.80. The company’s stock beta stood at 1.00, reflecting the same volatility of the stock as compared to the benchmark index.

Valuation Methodology


Conclusion
GlaxoSmith is a giant pharmaceutical and consumer healthcare company with decent fundamentals and growth prospects. The company has relatively high margins compared with its peers operating within the same business.

In the financial year 2019, the company expect a decline in adjusted EPS in the range of 5-9 per cent at CER. The company closes the Consumer Healthcare nutrition disposal business by the end of this year and anticipated the impact of the Tesaro acquisition. The company projected Consumer Healthcare Joint Venture (JV) with Pfizer to be closed during the half-yearly 2019 period. In FY2019, the company continue to expect a dividend per share of 80 pence.

Therefore, based on the long-term profitability prospects and valuation done using the above methodology, we have given a "Hold" recommendation on the stock, at the closing price of GBX 1,576.40 (as on June 21 2019), based on the 12.10x NTM Peers Average Price-to-Cash Flow-based valuation  (approx.) on the FY19E Cash Flow Per Share (approx.).
 

AstraZeneca PLC

AstraZeneca PLC (AZN), headquartered in Cambridge, the United Kingdom, is a biopharmaceutical company engaged in the development and commercialization of prescription medicines with operations in more than 100 countries. It’s primary focus areas for the treatment of diseases include oncology, respiratory, inflammation & autoimmunity, neuroscience, cardiovascular, renal & metabolism, infection & vaccines.

Recent News
On 19^th June 2019, AstraZeneca and MSD Inc., announced that Lynparza (olaparib) has been approved in Japan as a maintenance treatment after 1st-line chemotherapy in patients with BRCAm (BRCA-mutated) advanced ovarian cancer, as detected by an approved companion diagnostic test.

On 3^rd June 2019, the company announced detailed results from the Phase III POLO trial which showed encouraging results from its cancer drugs Lynparza and Imfinzi. Imfinzi was used for stage-three non-small cell lung cancer and Lynparza for pancreatic cancer, and the data suggested that the medicine was prolonging the lives of cancer patients. The company seeks to lead a global race to increase survival rates as its push into early-stage treatments for cancer is yielding results.

Financial Highlights (Q1 FY 2019, US$ million)

(Source: Q1 2019 Results, Company Website)

In the first quarter of the year, driven by the sustained performance of new medicines and Emerging Markets, the company reported product sales growth of 10% on the actual exchange rate basis to $5,465 million. Reflecting the growth in product sales, coregross profit increased by 7% (13% at CER) to $4,425m, while reported gross profit increased by 7% in the quarter (13% at CER) to $4,362 million. The core gross margin rose by two percentage points to 80.5%and reported gross margin rose by two percentage points (three at CER) to 79.3%.

Reported operating profit grew by 58% in the year (68% at CER) to $1,097m, and core operating profit surged by 84% (96% at CER) to $1,650m. The core operating margin rose by 13 percentage points to 30.0%, while the reported operating margin grew by seven percentage points to 20.0%. The reported earnings per share were up by 75 per cent (AER basis) to $0.47 in Q1 FY2019. The Core EPS was $0.89 in Q1 FY2019 and surged by 85 per cent (AER basis).

Share Price Performance

Daily Chart as at June-24-19, before the market closed (Source: Thomson Reuters) 

On 24th June 2019, at the time of writing (before the market close, GMT 1:16 PM), AZN shares were trading at GBX 6,420 and increased by 0.66 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 6,545/GBX 5,110. The company’s stock beta stood at 0.90, reflecting slightly lower volatility of the stock as compared to the benchmark index.

Valuation Methodology


Conclusion
The company has created a niche for itself in devising approaches effective at earlier stages of cancer, after initially falling behind competitors in developing treatments for metastatic cancer. Along with this, other highly productive and sustainable pipeline continued to be delivered, which could enable it to offer potentially transformative cancer treatment that could benefit patients around the world and provide the group with a lucrative source of reliable revenue.
In the latest results, the company had demonstrated decent operating-margin improvement, as its Core Operating Profit almost doubled over the year.

Therefore, based on the long-term profitability prospects and valuation done using the above methodology, we have given a "Hold" recommendation on the stock, at the closing price of GBX 6,378 (as on June 21, 2019), based on the 7.40x NTM Peers Average Price-to-Book Value-based valuation  (approx.) on the FY19E Book Value Per Share (approx.).
 
 
* All forecasted figures and peers have been taken from Thomson Reuters. Currency Rate 1 USD = 0.79 GBP.

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