3 Reasons GlaxoSmithKline's Stock Could Fall

Big pharmas have been a mixed bag this year in terms of the performance of their stock prices. Some companies like Merck & Co. (NYSE: MRK  ) have seen their stock prices soar as their reorganization and clinical efforts have helped to turn the tide against the so-called patent cliff. 

British pharma giant GlaxoSmithKline (NYSE: GSK  ) , by contrast, has struggled mightily this year in the face of falling revenues, clinical setbacks, and widespread allegations of bribery in far flung countries like Syria and China. As a result of these problems, Glaxo's shares have drastically underperformed the broader market over the past year, as shown by the chart below.

GSK Chart

GSK data by YCharts

While there are no guarantees that a certain stock will either rise or fall over any particular time period, it's always a good idea to consider the risks associated with any investment. With that in mind, here are three reasons why Glaxo's stock could continue to underwhelm moving forward.

Reason No. 1
Glaxo's best-selling respiratory drug, Advair, is losing the pricing and market share battle against AstraZeneca's (NYSE: AZN  ) Symbicort and Merck's Dulera. In the second-quarter, Advair sales dropped a whopping 19% compared to a year ago and experienced a 7% negative price impact because of competing drugs.

What should most concern investors is that this erosion of market share and profit margin for Advair is expected to continue for the foreseeable future and could even accelerate as newer drugs become commercially available. 

Compounding Glaxo's problems within the respiratory space, Breo doesn't look like it will be able to stem the tide anytime soon. Because Breo was recently excluded from Express Script's list of medicines eligible for reimbursement, Glaxo's strategy to transition away from Advair to Breo, and other newer respiratory drugs, has run into a significant roadblock, to put it mildly.    

Reason No. 2
The ongoing bribery investigations across six different countries have caught the eye of government officials in the U.K. and U.S. and this could translate into a massive fine. Remember, it was only about two years ago that Glaxo was hit with a record $3 billion fine from the Department of Justice for marketing some of its best-selling drugs for unapproved uses. 

Given that most of the current allegations center around bribing local doctors to increase sales, this latest incident might provoke even harsher penalties if a "pattern of corruption" is discovered. Put simply, Glaxo could be facing a big hit to its bottom line with yet another large fine. 

Reason No. 3
Unlike many other big pharmas that have increased share buybacks to help buoy their stock prices during their transition periods, Glaxo stated in its second-quarter earnings that the strength of the sterling on free cash flow means that share repurchases will be immaterial for the remainder of the year. In light of the fact that Glaxo's stock has dropped by double digits in the past six months and the company looks undervalued from a fundamental perspective, it's telling that management isn't willing to reward weary shareholders by buying back shares at this time. In short, the potential gains from buying at theoretically depressed levels should easily outweigh the negative impacts of the sterling to U.S. dollar exchange rate.

Foolish wrap-up
Glaxo presents a challenging bull vs. bear argument. On one hand, it's easy to view Glaxo as a classic value stock. After all, the stock's price-to-earnings ratio is significantly lower than the sector average, it offers an attractive dividend yield at current levels, and experts are projecting decent top-line growth next year.

On the other hand, however, Glaxo could be viewed as a value trap. Despite what look like improving fundamentals on paper, the market dynamics of the U.S. respiratory medicine market are going to prove difficult to overcome for the company's new cadre of drugs. Moreover, the possibility that Glaxo will come through unscathed from this bribery scandal is looking bleaker by the day. All told, sitting on the fence may be the best approach to this stock for the time being.

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