What Value Are The GlaxoSmithKline And Pfizer Joint Venture Going To Offer To The GSK Shareholders (GSK)?

  • Mar 15, 2019 GMT
  • Team Kalkine
What Value Are The GlaxoSmithKline And Pfizer Joint Venture Going To Offer To The GSK Shareholders (GSK)?

Business Overview

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

Key Statistics

Average Volume (mn) 6.87 Mkt. Capitalisation (£ bn) 74.81
Share Outs. (bn) 4.97 Free Float (bn) 4.95
52w High Price (GBp) 1,648.80 52w low Price (GBp) 1,269.80
Annual Div. Yield (%) 6.11 Annual Dividend (GBp) 92.0
EPS (TTM) (GBP) 0.7495 PE (x) 20.1x

 

The new consumer health joint venture between GlaxoSmithKline and Pfizer,

GSK has announced its willingness to form a new consumer health joint venture with the US-based Pfizer. The new alliance with Pfizer, in which GSK will have 68 per cent stake, will establish a venture with £9.8 bn of sales. More importantly, this will provide the scale required to become a giant global consumer health company. If things go well, the benefit of this proposition will be realised by the shareholders in the third year from the transaction’s completion with the demerger and flotation of the business.

One of the significant benefits of this joint venture is that GSK will be able to reduce its debt. This will provide GSK to spend more on innovative drug development. Recently GSK has acquired oncology specialist Tesaro in November 2018, which provides GSK control of Tesaro main drug, Zejula, which is currently approved in the United States and in Europe for ovarian cancer.

The company is providing its investors with two different routes to growth, one through high-risk drug development or low margin high volume consumer health business. However, shareholders have to face an earnings decline in 2019, but management's commitment to providing a dividend of 80p indicates that shareholders will be rewarded for any patience they are required to show.

Financial Performance – FY18

GSK’s revenue for FY18 stood at £30.8 billion, compared with £30.1 billion in FY17. Revenue grew by 5% on a constant currency basis (CER) and by 2% on annual equivalent rate (AER). During the financial year 2018 Pharmaceuticals business revenue stood at £17.3 billion, up by 2% CER. In FY18 Vaccines business grew by 14% on basis AER and by 16% on a CER basis at £5.9 billion. Consumer Healthcare business sales grew by negative 1% on AER basis and by 2% on a CER basis at £7.7 billion in FY18. In FY18, New Respiratory products sales stood at £2.6 billion, up by 35% on AER basis and by 38% on a CER basis. During FY18, HIV sales stood at £4.7 billion, up by 9% on AER basis and by 11% on a CER basis. Sales from Shingrix stood at £784 million, increased above 100% on AER basis, and also above 100% on a CER basis. Gross margin for FY18 stood at 17.8%, improved 430 basis points on AER basis and by 500 basis points on a CER basis. For FY18, Group's adjusted operating margin stood at 28.4%, improved by 50 basis points on a CER basis. Earnings Per Share of the group stood at GBp 73.7, up by more than 100% on AER basis and by more than 100% on a CER basis as well. For FY18, net cash flow from operation stood at £8.4bn, and free cash flow stood at £5.7bn, due to improved focus on cash conversion, primarily working capital. During Q4 FY18 company declared a dividend of 23 pence and a dividend of 80 pence for full-year FY18. During FY18, the group announced four significant deals including consumer healthcare joint venture to support strategy.

Stock Performance – 1 Year

(Source: Thomson Reuters)

Commentary

The outstanding market capitalisation of £74.8 bn ranks it among the large-cap stocks listed on the London Stock Exchange (LSE). At the close (as on March 14, 2019), shares of GSK ended the market session at GBp 1,508.8 rose 2.40 points or 0.16% against the previous close. During the last one-year time spam shares have registered a 52w high of GBp 1,648.80 and a 52w low of GBp 1,269.80 and at the current market price shares were trading 8.32% lower against its 52w high and 18.8% above its 52w low respectively. At the simple moving average standpoint (SMA), shares were trading below its 30-day, 60-day and 200-day simple moving average. Shares 5-day average daily volume traded on the LSE was 19.27% higher than the 30-day average daily volume. Stock's Beta of 1 indicates that volatility in the stock price is in line with the movement in the benchmark index. During the last one-year shares of GSK have delivered a return of 15.26%. Company's dividend yield of 6.1% was comparatively higher as compared to its peers.

Conclusion

At the current price, GSK is available at a cheaper price as compared to its peers and also provide the highest dividend yield compared to big pharma rivals. The deal as mentioned earlier between GSK and Pfizer will provide significant opportunities to create value in both of its business. Based on above factors we will recommend to keep a watch on GSK stock at this point of time.

 

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