Since March 2009 the FTSE 100 has soared 70%, yet drug stocks have been amongst the laggards. Some bears are even claiming the healthcare model is broken. They point to the closure of Pfizer’s research laboratory at Sandwich, intense regulatory scrutiny and the patent cliff. But this pessimism is overdone. With the world’s population getting older and increasing by the day, I expect demand to grow by 5% a year for the next 20 years. So this is exactly the right moment to pop a few Glaxo shares into your portfolio.
Glaxo possesses a coveted stable of top-notch treatments, including Advair for asthma, dermatological treatments and vaccines to protect against illnesses such as hepatitis and typhoid. In fact, boxes of its influenza products, Pandemrix and Relenza, flew off the shelves in 2009 as governments stockpiled against swine flu and the H1N1 virus.
This one-off boost meant 2010 suffered from tough comparatives. The firm was also hit by generic competition for its herpes drug, Valtrex, and the withdrawal of Avandia for diabetes. To compound the problem, Glaxo took a £2.2bn charge in the fourth quarter to settle product liability claims and fines. Once the distortive effects of these items are stripped out, underlying revenue grew a creditable 4.5%.
GlaxoSmithKline (LSE: GSK), rated a BUY by RBS
CEO Andrew Witty is confident about the outlook for Glaxo, as future patent expiries relating to blockbuster drugs are now largely behind it. Cutting-edge research, which comprises 12% of turnover, comes with the territory: its pipeline is full of exciting compounds, such as Benlysta for lupus, developed in partnership with Human Genome Sciences. Upwards of £5bn per year of new sales could be generated by 2015. Glaxo also owns an outstanding collection of consumer healthcare brands. These include a broad spread of over-the-counter medicines (eg, Gaviscon), alongside oral care (Aquafresh) products and nutritional drinks, such as Lucozade.
The City is forecasting 2011 sales and earnings per share to be £28.2bn and 116.5p respectively, with a tasty 5.5% yield to boot. The balance sheet is strong too, with net debt at a comfortable £8.9bn (or 1.3 times earnings before interest, tax, and amortisation, or EBITA) and a new share buyback programme in place.
In summary, GlaxoSmithKline is a classic widows-and-orphans stock. It is currently offering good value, trading on a p/e of ten. Royal Banks of Scotland has a price target of £16.10, compared to my fair value of £14.30 per share.
Recommendation: BUY at £11.80
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments