Right off the bat, you must know that it’s very difficult to go wrong with healthcare stocks, generally speaking. I’m not talking about start-up companies, or risky plays, I’m talking about well-established, reputable, large medical businesses. One such company is GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US).
In the middle of last year, Chinese authorities announced that in recent years GlaxoSmithKline used hundreds of travel agencies and consulting firms to funnel nearly three billion yuan in kickbacks to GSK managers, doctors, hospitals and others who prescribed their drugs. Did GlaxoSmithKline really think it could get away with this? Who knows… the company did, though, raise the white flag and four executives have since been arrested. That’s hurt GlaxoSmithKline’s reputation. The good news is that the company is making amends, and it’s certainly not alone in receiving a slap on the wrist by the authorities. Many of the UK’s banks have also been called into the Head Teacher’s office in recent years. You’d be hard-pressed to find any squeaky clean multinational corporation.
Even better, GlaxoSmithKline — whether it’s because it’s trying to make amends from its recent indiscretions or not — is now very much on the ‘PR front foot’, for want of a better term. As recently as last week, the pharmaceuticals company announced it was helping to lead the charge against the outbreak of the Ebola virus in West Africa.
This plays to two key elements of the company:
Firstly, the company does appear to have a social conscience. That’s crucial for its image — which is vital when it comes to healthcare companies. GlaxoSmithKline, too, is making obvious attempts to crack health problems in emerging countries. This all speaks well of the management culture (notwithstanding GlaxoSmithKline’s recent controversies).
Second, GlaxoSmithKline’s research and development budget is massive — we’re talking billions of dollars’ worth. Why is this important? Well, think of a pharmaceutical company’s R&D like a mining company’s exploration activities. It’s how these companies grow and evolve.
There will only be more and more demand for pharmaceutical products as the world’s population ages. There is also an emerging and growing gap between the world’s rich and poor. GlaxoSmithKline is well-positioned to lead the fight against the health dilemmas that will emerge from both of these issues.
And from a share market strategy viewpoint, healthcare companies the world over have been outperforming in recent years. For instance, if you had been overweight healthcare and consumer staples stocks in the past few years, there’s every chance your portfolio would be fatter than it was to start with.
The technical aspect of this stock speaks for itself. For the past five years, GlaxoSmithKline has been in a nice 45-degree up-trend. It was hit hard earlier this year as news emerged that it was facing criminal investigation for its misconduct (on more than one continent). The shares, though, have since rebounded. The healthcare giant has insisted it’s cutting the cancer out, and indeed says the disease of corruption is ”not systemic”. Maybe that’s why its shares are recovering.
The bottom line is that if the company can successfully clean up its act, it’s a stock market winner. The smart money says it will clean up its act, while recent evidence proves it’s at least back fighting the good fight.