Why now looks a good time to buy this blue-chip drug giant

GlaxoSmithKline has had a rotten time recently. But it’s still got plenty going for it. And now could prove a very good time to buy, says Ed Bowsher.


Glaxo: still got plenty going for it

GlaxoSmithKline (LSE: GSK) has had a rotten time recently.

A big bribery scandal in China has triggered an 11% fall in the share price since May.

Then this week, the drugs giant admitted that a clinical trial for a potential blockbuster drug had gone badly.

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But shareholders shouldn't be too gloomy. Even after this week's disappointing news, Glaxo still has a decent number of promising new drugs coming through in its pipeline. And profits and dividends are on the up.

In fact, now could prove a very good time to buy.

Glaxo's latest drug disappoints but there's plenty more where that came from

Now, despite this week's poor trial results, it's still possible that regulators might approve the drug in the end. But the chances of approval have fallen. And even if the drug does pass muster, sales will probably be lower than some analysts had previously thought.

So I can understand why the market has been spooked by the bad news. Particularly as, for the last decade or so, the discussion around big pharma' stocks like Glaxo has been all about the patent cliff'.

This cliff' refers to the fear that the big drugs companies are not developing enough new medicines to replace products that are about to lose their patent protection.

However, while this is a legitimate concern for some companies, it's not a serious issue for Glaxo not even after this week's disappointing news. Glaxo is developing new drugs at a decent pace. Four new products have been approved this year, including treatments for cancer and HIV.

What's more, Glaxo is about to launch a potential new blockbuster drug called Breo, which treats various respiratory conditions. This will replace one of its current bestselling drugs as it loses all of its patent protection.

Glaxo's China scandal

Glaxo executives have apparently been bribing Chinese doctors to boost sales

Sales in China have crashed as a result, with revenues falling 61% in the third quarter. This is clearly bad news. And it's hard to know whether this problem will be a temporary blip or a more prolonged struggle.

However, even if Glaxo never makes a strong recovery in China, it won't be a disaster for the company. Glaxo can still make good money elsewhere and achieve decent growth in other emerging markets. Even with this big crash in Chinese sales, for example, Glaxo was still able to deliver a 1% rise in overall sales for the quarter worldwide.

The other important point here is that all of this bad news is in the price'. Glaxo paid out a total dividend of 74p last year, putting the company on a dividend yield of 4.6%. That yield is well ahead of the market average and is pretty impressive given that Glaxo has consistently increased its dividend every year for the last 12 years recently by around 5% a year.

What's more, it has already spent more than £1bn on share buybacks in 2013 and trades on a price/earnings ratio of around 14 for this year.

Granted, when you look at a pharmaceutical stock, profits and dividends don't tell the full story. You need to be sure that the company has decent assets that can continue to generate profits in the future.

But Glaxo has those. It has a good portfolio of existing patent-protected drugs. It also has a strong development pipeline of new drugs coming through. And it also has the ability and pedigree to add new drugs to that pipeline in the future.

That's why I think Glaxo will continue to grow profits and dividends in future. To me, this is the sort of stock you want at the heart of a long-term portfolio it's delivering both income and some capital gains. I've owned shares since 2010 and I expect to hold them for many years to come. If you'd like to join me as a long-term shareholder, I think now's a good opportunity to make your move.

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Ed has been a private investor since the mid-90s and has worked as a financial journalist since 2000. He's been employed by several investment websites including Citywire, breakingviews and The Motley Fool, where he was UK editor.


Ed mainly invests in technology shares, pharmaceuticals and smaller companies. He's also a big fan of investment trusts.


Away from work, Ed is a keen theatre goer and loves all things Canadian.


Follow Ed on Twitter or Google+.