GlaxoSmithKline PLC: The All-Weather Dividend Giant

Britain's GlaxoSmithKline (NYSE: GSK  ) isn't built to run like a gazelle, but it has a pretty diverse business that addresses multiple large therapeutic areas like respiratory, vaccines, HIV, and consumer health. The company has taken some big swings with high-risk/high-reward pipeline candidates that haven't really worked out as hoped, but the pipeline still appears deep and broad enough to keep this supertanker-like pharma company moving forward at a steady pace.

Respiratory is good, bad, and ugly
AstraZeneca (NYSE: AZN  ) and Novartis (NYSE: NVS  ) also have large respiratory franchises, but Glaxo beats them both in terms of its reliance on this space as the company generates about 30% of its revenue from medications to treat conditions like asthma and COPD.

The good news is that Glaxo has two very young drugs with blockbuster ($1 billion or higher) sales potential – Breo/Relvar and Anoro. The bad news is that payers have been starting to push back on new respiratory therapies, namely due to "mixed" clinical data that do not unequivocally prove significant benefits over older, cheaper therapies. It's also not particularly good news for Glaxo that competition isn't easing up. Novartis, Forest, and Boehringer Ingelheim are all hoping to compete with Anoro for a piece of the multibillion dollar COPD market.

I believe respiratory care is an attractive but tricky space for Glaxo and Novartis. Generics are not as easy to manufacture as for other therapeutic areas, but it is proving increasingly difficult to develop novel compounds that offer significant improvements in efficacy and/or safety. The ugly truth is that COPD is still a leading cause of death, suggesting significant commercial opportunity for better therapies, but it looks as though realizing that opportunity will be quite challenging.

Big bets in the clinic haven't worked out so far
There is nothing wrong with Big Pharma companies taking the occasional big swing with a high-risk/high-reward compound. The problem is when companies put too much emphasis on these programs.

Glaxo's potential blockbuster darapladib (an Lp-PLA2 inhibitor) failed its Phase III STABILITY study for acute coronary syndrome, but the SOLID-TIMI study is still under way. Success would unlock blockbuster potential, but it really looks like a long-shot at this point.

Glaxo's cancer vaccine MAGE-A3 is in a similar place. A trial in melanoma failed to reach its endpoint, though a trial in lung cancer continues. Post-hoc analysis of the melanoma data may open the door to another study in a more narrowly defined patient group, but it is hard to call this a high-probability opportunity.

Radical change, or slow progression?
Unlike AstraZeneca, Glaxo hasn't faced a crisis of multiple patent expirations and clinical trial failures that leave its revenue and free cash flow cupboards bare. With that, Glaxo hasn't had to follow the route taken by AstraZeneca of multiple M&A transactions designed to refill the pipeline. Also unlike AstraZeneca, though, Glaxo has not built up a collection of really appealing oncology immunotherapy product candidates. Oncology has never really been a huge focus for Glaxo, and that may be part of the reason why the Street isn't quite as bullish on Glaxo as it is on some of its Big Pharma peers with otherwise similar traits.

Glaxo isn't yet at a point where management needs to do anything drastic. I do have some concerns about the respiratory franchise, but Glaxo's pipeline remains good (including the first triple-combo for COPD). The company seems focused on maintaining a relatively wide breadth of market/therapeutic class exposures at a time when many of its peers are getting less diversified, and I believe that will prove to be a good decision down the line.

The Bottom Line
I expect low-to-mid single-digit growth from Glaxo for the long-term, supporting a fair value more or less in line with today's price. Unlike AstraZeneca, those projections are based more on Glaxo following a "keep on keeping on" plan rather than realizing significant clinical trial wins and grabbing share in new markets. It's also well worth noting that Glaxo's dividend yield is above average, offering a little extra return amid a sea of fairly valued Big Pharma peers.

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