Please ensure Javascript is enabled for purposes of website accessibility

Where Will GlaxoSmithKline Be in 5 Years?

By Dave Kovaleski – Feb 11, 2020 at 6:30AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The U.K.-based pharmaceutical company is in a transition period.

Over the past five years, GlaxoSmithKline's (GSK -0.34%) stock price has been on a roller coaster, but more down than up. As of Feb. 10, the stock price's five-year return is negative 2%, significantly underperforming both the healthcare technology and pharmaceutical sectors.

Compared to its peers, the U.K.-based company has not proven to be a great investment over that time span. But what about the next five years? Will investors who buy its stock today be rewarded in the future?

A consumer looking at the label of a pharmaceutical product taken off the shelf.

GSK plans to spin off its consumer healthcare business. Image Source: Getty Images

New joint venture with Pfizer

Before looking ahead, let's look at where GlaxoSmithKline stands right now. The company had a good year last year with its stock price up 30.4% in 2019. But the stock is down about 5% this year, plunging around 4% on a weak fourth-quarter earnings report on Feb. 5 where it missed earnings estimates. Earnings were down for the quarter, year over year, but up slightly for the full year.

But the company is on the precipice of big changes that could alter its trajectory over the next few years.

Last August, GlaxoSmithKline acquired a majority stake in Pfizer's (PFE -0.61%) consumer healthcare business, bringing together GSK's Sensodyne, Voltaren, and Panadol brands with Pfizer's Advil, Centrum, and Caltrate brands.

The joint venture is now the market leader in over-the-counter products, with a share of 7.3% compared to 4.1% for its nearest competitor.

By 2022, the combination is expected to generate annual savings of about $900 million -- or 700 million pounds (GBP). About 25% of the savings will be to support innovation and growth opportunities. GSK expects the deal to be accretive to total earnings in the second year after closing.

The spinoff will cost $3.1 billion (GBP2.4 billion), comprised of cash costs of $2 billion (GBP1.6 billion) and non-cash costs of about $1 billion (GBP800 million). Plus, there is an additional one-time cost of $744 million to $900 million (GBP600 million to GBP700 million) to prepare the consumer healthcare segment for separation.

In the third year, the plan is to spin it off as its own company as GSK focuses on its pharmaceuticals and vaccines businesses, and its research and development pipeline. With the split, officials said the two companies will have better capital structures to invest and generate growth. The company is also reviewing its prescription dermatology business as a potential spin-off. 

"All of this aims to support future growth, deliver significant value creation, and set up two new leading companies in biopharma and consumer healthcare, each with the opportunity to improve the health of hundreds of millions of people, GSK's CEO Emma Walmsley said on the fourth-quarter earnings call.

Big transition

For the next three years, as the company prepares to split into two, there will be lots of restructuring. Last week, the company announced that about 720 jobs will be eliminated in its vaccine division in Belgium -- with most of the cuts at the managerial level. This coincides with a planned increase in R&D investments to strengthen its pipeline and launch new products. 

"As GSK increases its investments in R&D and in the launch of new products, this program aims to reinforce a common approach to R&D between the pharma and vaccine divisions, by improving the allocated funding and the decision-making concerning which vaccines or drugs to develop. This program will also allow the company to become more efficient," according to GSK's press release.

GSK is currently developing drugs to treat ovarian cancer and HIV, among others, that show great promise. With the increased investment in R&D, the company will be relying on these and other drug treatments to propel it into the future.

But don't expect much growth in the next couple of years as the company works through this transition period. In fact, the company projects earnings losses in 2020. 

With these changes it's making now, GSK is positioning itself for future growth. By 2022, the company expects to see cost savings from the spinoff and a sharper focus on R&D and new drugs. Investors may want to wait until those expense savings materialize in 2022 before investing, but in five years, that investment could look like a good opportunity. Only time will tell.

 

Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

GSK Stock Quote
GSK
GSK
$29.36 (-0.34%) $0.10
Pfizer Inc. Stock Quote
Pfizer Inc.
PFE
$44.16 (-0.61%) $0.27

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
342%
 
S&P 500 Returns
107%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/29/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.