3 Things to Loathe About GlaxoSmithKline

LONDON -- There are things to love and loathe about most companies. Today, I'm going to tell you about three things to loathe about GlaxoSmithKline  (LSE: GSK  ) (NYSE: GSK  ) .

I'll also be asking whether these negative factors make this FTSE 100 pharmaceuticals giant a poor investment today.

Long-term returns
GSK's long-run total return for shareholders (capital appreciation and dividends over the past 10 years) has lagged behind that of the average FTSE 100 company. Furthermore, as the table below shows, GSK has been one of the poorer performers among its European big pharma peers.

Company Total return
over 10 years
(annualized)
Roche 9.4%
Novartis 8.6%
Sanofi 8.3%
GlaxoSmithKline 5.9%
AstraZeneca 5.3%

Margin pressures
GSK, like all the established big pharma companies, faces what it calls "intense competition" from generic products within all of its major markets. This is particularly true of the U.S., where GSK has its highest turnover and margins, both of which are now under pressure from generics.

The U.S. accounts for almost a third of group turnover, and in addition to the squeeze from generics, the country's health care reforms are also putting pressure on GSK's margins.

Finally, the company's diversification into consumer health care has implications for group margins: the operating margin for pharmaceuticals and vaccines is running at over 36%, but the margin within the over-the-counter business is half that.

Concentration of risk
Another issue for GSK in the U.S. is that the sale of most of its products are made to a small number of wholesalers. In fact, more than 80% of the group's U.S. pharmaceuticals and vaccines turnover comes from just three wholesalers.

Trade receivables due from these three (that's the money they owe GSK) amounted to 815 million pounds -- the equivalent of 17 pence a share -- at the latest reckoning. This concentration of credit risk could potentially, as GSK says, "materially and adversely affect the Group's financial results."

A poor investment?
Many of the issues GSK faces are felt across the whole sector. Whether the sum of factors that constitute GSK's particular variation on the theme put the company in a better or worse position than its peers is a moot point.

Two of the world's top investors aren't prepared to argue it. Instead, they prefer to hedge their bets in a sector where the theoretical strength of the different companies' drugs pipelines isn't a reliable guide to which products will actually turn out to be the biggest winners.

Legendary U.S. investor Warren Buffett and renowned U.K. fund manager Neil Woodford both choose to invest across several big pharma companies.

If you already own shares in GSK, you may be interested in reading about two other pharma firms that Woodford has also backed in this exclusive Motley Fool report.

The report, which has been newly updated, also covers five more of the master investor's current favorite blue-chip holdings. This is a veritable feast of analysis -- and what's more it's totally free!

To have the report sent to your inbox immediately, simply click here.


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