The Best Drug Stock for 2007: GlaxoSmithKline

What does an investor look for in a pharmaceutical firm? Blockbuster drugs on the market and in the near-term pipeline? A consumer-products division, to keep cash flows strong during interim down cycles? How about an aggressive policy of partnering with biotechnology firms to participate in future medical advances? All of these can be found in Motley Fool Income Investor selection GlaxoSmithKline (NYSE: GSK  ) . Add a nice juicy dividend and a shareholder-friendly policy of stock buybacks, and you've got a winning combination for 2007.

Glaxo is the third-largest pharmaceutical firm in both market cap and sales, trailing only Pfizer (NYSE: PFE  ) and Johnson & Johnson (NYSE: JNJ  ) . As Brian Lawler pointed out when making the case for GSK as the top overall blue-chip stock for 2007, the company has shown better past revenue growth and operating margins than either of its larger pharmaceutical peers.

Analysts do expect that growth to slow a bit in 2007, as the company faces generic competition and patent expirations on a few of its blockbuster drug products. Just recently, Barr Pharmaceuticals (NYSE: BRL  ) , in collaboration with Par Pharmaceutical (NYSE: PRX  ) , released a generic form of Glaxo's chemotherapy support drug, Zofran. GlaxoSmithKline intends to minimize such revenue losses by extending products' lifetimes -- replacing its twice-daily Coreg treatment for cardiovascular indications with the single-dose extended-release Coreg CR, for example. The company also expects continued expansion of this drug's usage into indications such as chronic obstructive pulmonary disease (COPD).

The best strategy for replacing revenues from drugs that go off-patent is to bring new chemical entities (NCEs -- pharma lingo for new drugs) to market. In 2007, Glaxo should see approvals or phase 3 trial results for drugs such as Tykerb, for breast cancer; Cervarix, a vaccine against human papillomavirus; and Allermist, for allergic rhinitis eltrombopag, to name a few. Glaxo also expects continued or restored growth from currently approved drugs such as Avandia, a compound for diabetes treatment that suffered supply issues in 2006, and Requip, a treatment for the restless leg syndrome (RLS) market. (This all-too-frequently-mocked segment nonetheless generates total revenues exceeding $500 million.)

If new products weren't enough to potentially provide for upside stock movement and surprises in 2007, GlaxoSmithKline has also been very active in the biotechnology market, in both partnerships and acquisitions. The last couple of months have seen a tender offer to both Praecis Pharmaceuticals (Nasdaq: PRCS  ) and Domantis. The company also recently bolstered its consumer-products division by closing on the purchase of former Hidden Gems selection CNS, maker of Breathe Right nasal strips.

I've read reports from a few industry analysts who believe that the blockbuster-driven era in big pharma may be ending. These analysts also often believe that active partnership and merger activity will drive future growth. Glaxo has been very active in signing drug-development partnerships with a diverse set of young companies such as EPIX Pharmaceuticals and Rule Breakers selection Exelixis (Nasdaq: EXEL  ) , which should help keep the development pipeline full.

Finally, as a Glaxo shareholder, I'm pleased with both the recent dividend increase and the announced multibillion-dollar share buyback program, the latter of which will take place over the next three years. Both are very shareholder-friendly actions.

Do you also believe that GSK is poised for future growth? Which pharmaceutical firm do you think will have the best showing in 2007 and beyond? Let us know by joining our Motley Fool CAPS community and rating GSK as "outperform" or "underperform." Based on your opinions, we'll determine the best drug company for 2007, and report the results next week.

For more on GlaxoSmithKline and the pharmaceutical industry, see:

Discover our other Foolish candidates for the best drug stock for 2007.

GlaxoSmithKline and Johnson & Johnson are both selections of the Motley Fool Income Investor newsletter. Pfizer is an Inside Value choice. Exelixis is a Rule Breakers pick. Whatever your investing style, the Fool has a newsletter for you, and a 30-day free trial to boot.

Fool contributor Ralph Casale owns shares in GlaxoSmithKline and Johnson & Johnson, but holds no financial position in any of the other firms mentioned. The Motley Fool has a disclosure policy.

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