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GlaxoSmithKline plc (ADR) (GSK): Why Investors Should Consider It

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GlaxoSmithKline plc (ADR) (NYSE:GSK)GlaxoSmithKline plc (ADR) (NYSE:GSK) is a pharmaceutical and healthcare company headquartered in the United Kingdom. GlaxoSmithKline is one of the largest pharmaceutical companies in the world with a market cap of $112 billion. The company was founded in 2000, as a result of a merger between Glaxo Welcome and SmithKline Beecham. Below is a snapshot of GlaxoSmithKline plc (ADR) (NYSE:GSK)’s fourth quarter results.

Q4, ANALYSIS:-

During the fourth quarter, GlaxoSmithKline plc (ADR) (NYSE:GSK)’s earnings declined by 36.7%. In addition, revenues of the company also did not exhibit much growth, as they remained flat at around $11 billion. Even though, the company did not exhibit any growth in revenues, nonetheless, the management estimates a marginal increase of 1% in revenues going forward.

In contrast, the management expects to report a core earnings growth of 3% – 4% during the fiscal 2013. This is predominantly due to company’s conscious initiative to control costs, restructure operations and its entire product portfolio.

During the quarter both Pharmaceuticals, Vaccines, and Consumer Healthcare sales were below expectations. Pharmaceutical revenues fell by 1% due to generic competition and price cuts in the EU. Nevertheless, revenues through Vaccines increased by 10% underpinned by a robust performance in the US and the Asia Pacific region.

Within the Consumer Healthcare Business, Oral Care segment reported a growth of 10%, additionally, Nutrition and Skin care segment also increased by 9% and 5% respectively. Although, the growth in the Total Wellness segment surprisingly declined by 12%.

So far the numbers listed are not indicative of a highly optimistic outlook on the company. However, following factors still allow me to keep a bullish view on this stock.

Why investors should consider this GlaxoSmithKline

New products in the pipeline

Over the next three years, GlaxoSmithKline plc (ADR) (NYSE:GSK) has planned to launch 15 new products globally. The successful development and commercialization of these products will bolster the company’s top line in the future.

Cost – Cutting Initiative

GlaxoSmithKline is now relying on cost-cutting initiatives to drive its bottom line. The company plans to focus on restructuring its operations in Europe and improving efficiency in supply, manufacturing and R&D. The program is expected to yield an annual cost saving of at least £1 billion by the end of 2016. I believe, the cost – cutting initiative will facilitate the earnings to grow relatively faster than revenues.

Diversified Base Should Support Revenues

GlaxoSmithKline plc (ADR) (NYSE:GSK) has increased its presence in different regions across the globe in order to diversify its revenue streams. Expansion into Japan and other emerging markets such as India and China should provide new opportunities for growth. Investors should note, during the fiscal 2012, sales from emerging markets grew by 10%. I expect the trend to continue, as the company is expected to further strengthen its presence in the region.

GlaxoSmithKline, increased its stake in the consumer healthcare subsidiary located in India during 2012. The stake was raised from 43.2% to 72.5%, which is indicative of the growth potential in the emerging markets.

Competition from Larger Players in the Industry

GlaxoSmithKline, presently faces a stiff competition for its key drugs such as Valtrex, Lamictal, Imitrex, Requip, Combivir and Epivir. The prime competitors for GlaxoSmithKline plc (ADR) (NYSE:GSK) are large pharmaceutical companies such as; Pfizer Inc. (NYSE:PFE) and The Procter & Gamble Company (NYSE:PG)

Pfizer Inc. (NYSE:PFE) generates highest percentage of its revenues through Diversified Legacy Drugs, at around 29.4%. This is followed by Prevnar & Other Anti-Infective Drugs at around 14%. Further, it also generates 26% of its revenues through Lyrica and Nervous System Drugs and Celebrex Drugs.

Pfizer Inc. (NYSE:PFE) has a market capitalization of $221 billion, and the present stock price is trading very close to its 52-week high. The company reported revenues and gross profit of $59 billion and $48 billion respectively during the fiscal 2012. It is noteworthy that Pfizer operates on an extremely high gross margin of 81%. According the projections offered by Trefis, the FCF-Gross profit % will be around 36% by the end of fiscal 2013.

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