Today I am detailing why I believe GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) is a worthy investment for any portfolio.
Rising demand from new markets
With economic growth in developing regions and thus investment in domestic healthcare continuing to power higher, demand for GlaxoSmithKline’s suite of market-leading products is likely to keep on rising.
Indeed, the pharmaceutical-play saw emerging market demand across its Pharmaceuticals and Vaccines division climb 5% in 2014, to £3.2bn. The business noted particular strength in non-Asian regions, with sales in Brazil, for example, leaping 12% last year, to £380m.
China remains a problem for GlaxoSmithKline as it attempts to mend bridges following the well-publicised corruption scandal there. Sales in the country dipped 1% last year, with the drawn-out investigation only being wrapped up in September after the business agreed to swallow a £297m penalty. But having been made an example of by lawmakers in Beijing, GlaxoSmithKline can now get back to the business of selling its drugs in the country.
R&D drive set to pay off
Strong demand from new markets is an absolute necessity for GlaxoSmithKline, given that patent expirations in its key Western markets continues to weigh heavily on group sales.
In response to these problems, GlaxoSmithKline is taking an innovative approach to enhancing its R&D pipeline, achieved through a combination of organic investment, group reshaping and shrewd acquisitions in strategic areas. Like the rest of the healthcare sector, the business is having to adopt a more measured approach to boost R&D as pressure on revenues hampers lab spend.
The Brentford firm has identified vaccines as a key growth area, and is in the process of hammering out a three-part deal with Novartis which will see it purchase the Swiss firm’s operations in this area for an initial $5.25bn in exchange for its own oncology business for $16bn. It will also establish a joint consumer healthcare business in which GlaxoSmithKline will hold a controlling stake.
The move not only boosts the number of GlaxoSmithKline’s drugs in late-stage development, but also bolsters the company’s presence in its strategic areas of HIV, respiratory, consumer healthcare and vaccines.
Dividends yields poised to impress
And of course the deal will go a long way towards bulking up GlaxoSmithKline’s balance sheet, the strength of which has come under considerable pressure due to persistent revenues weakness and adverse currency movements.
On top of this, GlaxoSmithKline’s aggressive cost-cutting drive is also delivering the goods and the business achieved £400m worth of incremental annual savings in 2014.
These measures will of course be welcomed by income hunters, and the company has said that it expects to keep the full-year dividend in line with last year’s levels at around 80p per share. Although such a move would put paid to GlaxoSmithKline’s entrenched, progressive payout policy, such a payment would still realise a juicy 5.2% yield.