Is GlaxoSmithKline dive overdone?

In the context of what has been a very promising start to 2018 for GlaxoSmithKline (GSK), today’s post-Q1 results share price decline shouldn’t be cause for alarm among investors.

A 2% fall in both sales and earnings per share (EPS) for the first three months of the year reflected the impact of a stronger pound, with the performance at constant exchange rates showing growth of 4% and 11% respectively.

More significantly, the group reported encouraging starts for its most recent product launches in the shape of shingles vaccine Shingrix, respiratory prospect Trelegy and new HIV treatment Juluca.

Such progress is important at a time when attention is now firmly back on improving the pharmaceutical giant’s under-performing R&D pipeline.

CEO Emma Walmsley reiterated this as her number one capital allocation priority after deciding to shun a blockbuster M&A deal in consumer healthcare.

By walking away from the recent auction for Pfizer (PFE)’s consumer healthcare business, she ended months of worry among investors who had feared that their prized 80p a share dividend from GSK could be under threat.

With GSK also tidying up ownership of its consumer healthcare joint venture with Novartis in recent weeks, shares have risen by 15% in just over a month.

That came to an abrupt halt today as fears that 2018 could be blighted by currency headwinds caused investors to take recent profits. This was despite quarterly EPS of 24.6p an sales of £7.2 billion being broadly in line with hopes.

UBS recently said that GSK was achieving close to sector average EPS growth and that the slide in the share price over the second half of 2017 had looked unwarranted when compared with rivals. The bank had a 1600p price target, based on 14.8 times 2018 EPS and against a sector average of 16x.

Source: interactive investor         Past performance is not a guide to future performance

UBS believes GSK is capable of achieving 5% EPS improvement between 2017-20 just by “getting the simple things right”. This includes growth in Shingrix and Trelegy, which it predicts will account for half of forecast 2017-22 top-line growth.

Trelegy should give GSK much better access to the smoker’s cough market, while the company said today that Shingrix had already recorded sales of £110 million in its first full quarter in the United States and Canada.

This will help offset the impending arrival of generic versions of GSK’s blockbuster drugs in the US. In the event of a competitor to lung inhaler Advair, the group expects adjusted EPS to be flat to down 3% at constant exchange rates, rather than growth of between 4% and 7% without a new rival.

Glaxo declared a dividend of 19p a share for the quarter and reiterated that another 80p dividend in relation to this financial year was on the way, maintaining a level of payment dating back to 2015 and yielding around 6%.

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