Are shares in GlaxoSmithKline plc now in bargain territory?

Shares in FTSE 100 pharmaceutical giant GlaxoSmithKline (LSE: GSK) were in the red this afternoon. That was despite the company reporting a 21% rise in sales (in sterling terms) over the fourth quarter and “continued momentum” in 2016 as a whole. Does this present a buying opportunity for private investors? 

Return to form?

Over the full year to the end of December, group sales climbed 6% to £27.9bn, with all three of its businesses registering growth. Broken down, Vaccines was the best performing segment, with sales rising 14% to £4.6bn compared with the previous year. Pharmaceutical sales — which still contribute the bulk of the company’s profits — rose 3% to £16.2bn, while its Consumer Healthcare business also recorded growth of 9% to £7.2bn.

Perhaps most positively, new product sales at the company more than doubled to £4.5bn in 2017 with its HIV treatments, respiratory medicines and meningitis vaccines performing strongly. 

Although total earnings per share for the year came in significantly lower at 18.8p, this was largely due to the prior year’s results including the £9.2bn profit Glaxo made after selling its Oncology assets to fellow pharmaceutical giant Novartis in 2015.

Commenting on results for the final time, outgoing CEO Sir Andrew Witty said that the next two years would be “significant” for the company’s pipeline and mark the beginning of “another intense period of R&D activity“.

Bargain buy?

Despite today’s fairly positive news, shares in GlaxoSmithKline trade on just 14 times earnings for 2017. Factor-in the chunky (if stagnant) 5% yield and the investment case starts to look interesting.

Whether investors should consider buying a slice of the company will probably rest, however, on how kind they believe 2017 will be to it. After benefiting from sterling’s recent weakness, Glaxo will be hoping that exchange rates remain around their current level for the rest of the year. If not, its share price may come under renewed pressure.

It has also indicated that performance will depend on whether a generic version of its blockbusting lung drug, Advair, is introduced to the US market. If one doesn’t appear, core earnings per share will come in somewhere between up 5% and 7%. Should its fears be realised, earnings will be either be flat or slightly lower.

Jam tomorrow?

Although its hard to say whether shares in Glaxo are a bargain at the current time, they do look a better play on the pharmaceutical sector when compared to those of FTSE 100 peer, Astrazeneca (LSE: AZN).

Despite posting stronger-than-expected Q4 earnings last Thursday. The £56bn cap provided a gloomy outlook for 2017 after highlighting that sales — particularly those relating to its blockbuster drug, Crestor — were continuing to come under pressure from generic competitors. In contrast to GlaxoSmithKline, the company went so far as to predict a “low-to-mid single-digit” decline in total revenues and “a low-to-mid-teens percentage decline” in core EPS.  

Even though a P/E of 15 for 2017 (reducing to 14 next year) doesn’t appear overly expensive, I continue to be concerned by the company’s ‘jam tomorrow’ message. Talk of reaching the end of its “patent-expiry period” and the unveiling of “several life-changing medicines for cancer, respiratory and metabolic diseases” over the course of this year is all very well. But I still need to be convinced that the Astrazeneca’s return to long-term growth is as close as management claims.