Is the GSK share price worth buying?

Being a shareholder in GlaxoSmithKline (LSE: GSK) can’t be boring. Over the past year, the stock has bounced between 1,400p a share and 1,700p a share. Over a longer time scale, the situation is the same, with the stock frequently oscillating between 1,300p and 1,700p over the last five years. Right now, it is trading near the top of this range. Is there reason to believe that it might continue to rise? Let’s dig deeper.

Recent developments 

First things first. In a recent trading update for the second quarter, Glaxo posted total revenues of £7.8bn, of which £4.3bn came from pharmaceuticals. This was good for a 7% total revenue increase year-on-year. This allowed management to improve its guidance for 2019 to a 3% to 5% decrease from the previous year. This doesn’t sound that great, but it should be viewed in the context of the 5% to 9% drop that had previously been guided for. 

The best results came from the pharmaceutical giant’s vaccines segment. Here, sales increased by a whopping 26%, no mean feat considering that total revenue for the division came in at £1.6bn. Management also confirmed that Glaxo’s dividend will be maintained at 80p a share (per year). 

A deep pipeline

As mentioned, Glaxo’s biggest gains recently have been in vaccines. In particular, its shingles vaccine Shingrix has been performing extremely well, bringing in £386m in revenue in the second quarter. This was due to high levels of demand in the US, as well as Germany and Canada. Earlier this year, Glaxo received approval from Chinese authorities to market Shingrix in the country. CEO Emma Walmsley should be confident that Shingrix will continue to be a driver of growth for the company. Furthermore, Glaxo boasts a very busy pipeline of promising new drugs, ranging from HIV treatments to respiratory medications. 

That said, Glaxo has had to contend with a serious headwind. It recently lost exclusivity for Advair, the company’s blockbuster asthma treatment. To give you a measure of just how big this is: Advair is the fourth most-prescribed medication in the USA over the last quarter century. When pharmaceutical rival Mylan released a generic competitor to Advair earlier this year (at a 70% discount), sales predictably collapsed. In the second quarter of 2019, US sales of Advair dropped 61%, bringing in just £105m, a far cry from the yearly haul of £6.75bn that the drug brought in at its peak in 2013.  Management has been preparing for this patent cliff for years and the market has been baking it into its earnings estimates, which is why Glaxo’s shares didn’t collapse following the release of those sales figures. However, it still leaves a void that needs to be filled. 

Is it worth the investment?

Glaxo currently trades at a P/E ratio of 15 and a dividend yield of 4.75%. To me, that seems somewhat expensive for a company that is still dealing with the loss of a once-in-a-century product. The P/E ratio and yield are essentially in line with the FTSE 100 average, which also does not give me a reason to get involved. True, pharmaceutical companies across the board are quite expensive. But luckily we don’t have to have positions in every single sector. All in all, I think that while Glaxo is well-positioned for the long-term, its current valuation does not justify an investment.