3 Things to Loathe About GlaxoSmithKline plc (ADR) (GSK)

LONDON — There are things to love and loathe about most companies. Today, I’m going to tell you about three things to loathe about GlaxoSmithKline plc (ADR) (NYSE:GSK).

I’ll also be asking whether these negative factors make this FTSE 100 pharmaceuticals giant a poor investment today.

GlaxoSmithKline plc (ADR) (NYSE:GSK)

Long-term returns
GlaxoSmithKline plc (ADR) (NYSE:GSK)’s long-run total return for shareholders (capital appreciation and dividends over the past 10 years) has lagged behind that of the average FTSE 100 company. Furthermore, as the table below shows, GlaxoSmithKline plc (ADR) (NYSE:GSK) has been one of the poorer performers among its European big pharma peers.

Company Total return
over 10 years
(annualized)
Roche 9.4%
Novartis 8.6%
Sanofi 8.3%
GlaxoSmithKline 5.9%
AstraZeneca 5.3%

Margin pressures
GlaxoSmithKline plc (ADR) (NYSE:GSK), like all the established big pharma companies, faces what it calls ”intense competition” from generic products within all of its major markets. This is particularly true of the U.S., where GlaxoSmithKline plc (ADR) (NYSE:GSK) has its highest turnover and margins, both of which are now under pressure from generics.

The U.S. accounts for almost a third of group turnover, and in addition to the squeeze from generics, the country’s health care reforms are also putting pressure on GlaxoSmithKline plc (ADR) (NYSE:GSK)’s margins.

Finally, the company’s diversification into consumer health care has implications for group margins: the operating margin for pharmaceuticals and vaccines is running at over 36%, but the margin within the over-the-counter business is half that.

Concentration of risk
Another issue for GSK in the U.S. is that the sale of most of its products are made to a small number of wholesalers. In fact, more than 80% of the group’s U.S. pharmaceuticals and vaccines turnover comes from just three wholesalers.

Trade receivables due from these three (that’s the money they owe GSK) amounted to 815 million pounds — the equivalent of 17 pence a share — at the latest reckoning. This concentration of credit risk could potentially, as GSK says, ”materially and adversely affect the Group’s financial results.”

A poor investment?
Many of the issues GSK faces are felt across the whole sector. Whether the sum of factors that constitute GSK’s particular variation on the theme put the company in a better or worse position than its peers is a moot point.

Two of the world’s top investors aren’t prepared to argue it. Instead, they prefer to hedge their bets in a sector where the theoretical strength of the different companies’ drugs pipelines isn’t a reliable guide to which products will actually turn out to be the biggest winners.

Legendary U.S. investor Warren Buffett and renowned U.K. fund manager Neil Woodford both choose to invest across several big pharma companies.

The article 3 Things to Loathe About GlaxoSmithKline originally appeared on Fool.com.

G.A. Chester has no position in any stocks mentioned. The Motley Fool recommends GlaxoSmithKline.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 10 Most Expensive iPhone Apps

The 9 Most Expensive Designer Shoes in the World

The 10 Most Expensive Cigarette Brands

The 10 Most Expensive Law Schools in the US

The 10 Best Wall Street Movies

The 10 Most Expensive Golf Clubs Ever Sold

The 10 Most Expensive Golf Memberships

The 10 Best Disney Characters Ever Created

The 8 Best Foods for Gaining Weight

The 10 Most Expensive Colleges in the World

The 7 Most Memorable Ad Campaigns of All Time

The 7 Most Expensive High Schools in the World

The 10 Electric Vehicles with the Longest Range

The 10 Cities with the Worst Drivers in the World

The 10 Most Expensive Dresses Ever Created

10 Islands to Visit Before You Die

10 Famous Celebrities Who Needed Rehab

The 15 Countries with the Largest Oil Reserves

The 10 Most Overused Excuses in the World

The 5 Best iOS Apps You Can’t Get on Android

5 Companies Damaged By Social Media Blunders

The 10 Most Legendary Blues Songs

The 10 Most Lawless Places in the World

4 Reasons China is a Threat to the US

The 17 Most Sugary Drinks in the World

The 10 Most Ruthless Rulers in History

The 10 Greatest Generals in History

Top 8 Travel Destinations for 2015

The 10 Safest Dog Breeds for Children

The 10 Most Stolen Vehicles in the US

The 7 Most Expensive Celebrity Weddings

The 10 Best LoL Teams in the World

Top 10 Worst Marketing Campaigns Ever Produced

Top 5 Diets that Help You Lose Weight

The 10 Best Ways to Stay Awake

7 Artists That Switched Musical Genres

The 10 Most Expensive Cities to Live in New Jersey

The 10 Best High Schools in New York

The 10 Countries With the Least Gender Inequality

The 6 Biggest Musician-Manager Feuds

The 10 Countries with the Cheapest Gas Prices

The 7 Most Theatrical Bands of All Time

The 8 Worst Band Breakups of All Time

The 10 Most Important South American Leaders

The 7 Most Successful Casting Show Winners

The 10 Most Peaceful Countries in the World

5 Big Reasons Communism Failed

The 15 Most Famous Carl Icahn Quotes

10 Scary Animals that are Actually Harmless

The 8 Most Famous Singer-Actors in Entertainment

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!