StreetTalk: Banking on a Pharma Giant - The bullish case fpr GlaxoSmithKline is based on a 12% growth rate, a new vaccine for HPV virus, and surging sales of a hypertension drug - BioPharm

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StreetTalk: Banking on a Pharma Giant
The bullish case fpr GlaxoSmithKline is based on a 12% growth rate, a new vaccine for HPV virus, and surging sales of a hypertension drug


BioPharm International
Volume 19, Issue 11

Morningstar adds that Glaxo has an excellent record of value creation. Return on invested capital has exceeded 15% every year since 1999, and cash flow from operations has consistently generated approximately $3.00 per ADR share. The analyst group estimates the 2006–2007 growth rate for Glaxo at about 9%. Long-term growth averages out to 5% annually through 2015—as good a group of numbers as you'll see in the biopharm sector these days.

FLYING HIGH

I suspect that Glaxo executives know much more about their future fortunes than any dozen Wall Street spreadsheet spouters do. Because of guidance that is likely understated, that tells us that the company is probably undervalued in the marketplace.

That's one reason among many to give full weight to Glaxo. Another is the strong possibility that the company will have, sometime in 2007, a widely available human vaccine for the H5N1 bird flu. That hasn't hit a mainstream news media consumed, right now, by the November elections. Morningstar says that Glaxo's avian flu drug should be a "major seller" for the company in 2007. So when the news does hit, it will likely drive Glaxo's stock price up as bird flu fallout takes the place of Congressional scandals and bomb-crazy North Korean dictators on the front pages of our nation's newspapers, magazines, and news broadcasts.

More good news? Glaxo's product pipeline is chock full. As of Spring 2006, the company had approximately 250 pharmaceutical and vaccine projects in development, and, as we've already established, a dominating presence already on both sides of the pharmacy counter.

Company stock is trading at roughly a $55-per-share level in autumn 2006, up from a low of $35 in 2003; $40 in 2004, and $48 in 2005. Market capitalization is solid at $164 billion, and the stock pays a nice dividend yield of $1.67 (about 3%)—a nice bonus on top of solid stock performance.

Glaxo is also getting good news from the judicial bench. This summer, the EU's Court of First Instance told EU antitrust regulators to check agreements between Glaxo and Spanish wholesalers to limit resale of drugs abroad. Glaxo claims that wholesalers are packaging Glaxo drugs at a low price and then shipping to other EI countries at higher prices. It is a practice that Glaxo wants stopped and the EU courts apparently agree. The court ruled that wholesalers engaging in such practices are breaking antitrust laws, but the court said the pharmaceutical sector was unique because the prices of medicines are not freely determined.

POTENTIAL BARRIERS

Sure, Glaxo is not without its headaches. The Internal Revenue Service is challenging the company's tax statements from 1989 to 2000. If any IRS judgment goes against Glaxo, that could result in billions in back tax payments and interest. And three of Glaxo's most profitable drugs have lost their patent protection in the past two years (antidepressants Paxil and Wellbutrin, and anti-infective Augmentin).

But that news is more than outweighed by news that Glaxo is rolling out a new vaccine (Cervarix) for the HPV virus, which Morningstar predicts will generate billions in potential sales. Meanwhile the company's cardiovascular hypertension drug, Coreg, is seeing its sales surge. Consequently, Glaxo, the number two producer of vaccines in the world, is poised for some serious growth in 2007.

With apologies to Peter Lynch, you don't need a stroll through the pharmacy aisle to tell you that.

Please note that I am not an owner of Glaxo stock and, in the interests of objectivity, won't buy any company stock for one year after this column is published.

Celebrity author and business/finance commentator for CNN and Fox News, Brian O'Connell has written for The Wall Street Journal and Newsweek, 79 Radcliffe Drive, Doylestown, PA 18901, 267.614.1992, fax 267.880.1939,


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