London stocks ended the day down yesterday, mainly due to investors pausing for breath after a nice bounce from recent lows. At close the blue-chip index was off slightly at 6,139, well above the recent low of 5,537 at the close on 11 February.
Amongst the list of fallers were healthcare sector peers GlaxoSmithKline (LSE: GSK), off by 1.3% to 1,396p and Indivior (LSE: INDV), off by 2.1% to 166p. Now that both companies have released their final results, I’m weighing up whether the management teams are directing the businesses on the correct paths to profitable growth.
The chart says it all
It’s often the case that a quick look at a chart can give an indication as to the performance of the underlying business, and I think that this is the case here too. As we can see, Indivior has had a substantial fall from grace as investors headed for the exit following interim results in July and disappointment that the FDA didn’t approve the company’s Naloxone Nasal Spray, a new drug application for opioid overdose.
Also well off its recent highs, GlaxoSmithKline seems to have investors worried as management focuses on integrating the new businesses in Vaccines and Consumer Healthcare and restructure the Global Pharmaceuticals business.
Beating expectations but cancelling the dividend
I felt that the share price of Indivior had fallen too far, mainly due to a toxic combination of negative sentiment towards the industry in general following a campaign pledge from Presidential hopeful Hillary Clinton to crack down on rising prescription drug prices. She also plans to hold drug companies accountable so they get ahead by investing in research, not jacking up costs. General market volatility that has been around for a good six months now has also hit the shares.
However, the shares took a turn for the good, despite the company signalling that it would pass on future dividends once the final dividend was paid. It seems that this decision was taken due to the strategic decision to reinvest around an additional $35m in R&D and pre-commercialisation activity for launch of Buprenorphine Monthly Depot for opioid dependence.
Turning to valuation, analysts have again been required to upgrade their expectations for 2016 and 2017, which means that the shares now trade on a sub-11 times forecast earnings. This makes them look quite interesting to my mind.
A business in transition
I think that investors may be starting to warm to what could be a transformational new direction for GlaxoSmithKline. While 2015 earnings came in slightly above guidance, for the stock market, it’s all about the future, and this is where the management sounded rather bullish.
Management continued to expect double-digit constant currency growth, 80p in dividends for 2016 and 2017, and significant opportunities for the new R&D portfolio, of which approximately 80% has the potential to be first in class. In 2016/2017, development milestones are expected for assets such as: Shingrix, sirukumab, ICS/LABA/LAMA, cabotegravir, daprodustat and the Men ABCWY vaccine. In addition, it’s also expected that there will be up to 20 Phase 2 starts for assets in Immuno-inflammation, Oncology, Respiratory and Infectious diseases.
Following the results analysts have started to increase their earnings expectations, which is a key driver behind a company’s share price performance, and should analysts continue to upgrade their expectations, I would expect the share price to follow.