Shares of GlaxoSmithKline
There's nothing good about a major medical journal releasing a negative article about a pharmaceutical company's second highest-grossing drug. However, events like this can be opportunities for long-term investors to pick up shares on the cheap.
The article in the NEJM was a meta-analysis of GSK's diabetes treatment Avandia. The study found that the drug may increase the risk for cardiovascular adverse events. Once the study came out, many people must have had visions of all Avandia sales disappearing. Fortunately, barely three weeks later GSK released results from an unplanned interim analysis of a long-term safety study of Avandia. Those results showed the drug did not have statistically significant worse cardiovascular issues than a control group consisting of another diabetes treatment.
Unfortunately, there's not enough room here to discuss the statistical perils and problems when trying to reach conclusions from meta-analyses (combining data from several different clinical trials and analyzing them as if they were one study) like the article's authors did. Meta-analyses can be subject to a host of statistical no-no's and should only be used as supporting evidence, not direct proof of a drug's efficacy or safety issues.
Even if we take the worst-case scenario, in which all Avandia sales go to zero, (which is completely implausible), the drug only represents 7% of GSK's nearly $46 billion in sales last year. If Avandia sales are cut in half, for example, then GSK's top line only falls 3% to 4% compared with last year. This is hardly enough to warrant the 10% drop in GSK shares over the past weeks.
There will be some short-term pain from somewhat lower Avandia sales in the coming quarters, but GSK has other revenue growth drivers that are either coming on the market or just beginning their sales ramp-up. Its human papillomavirus vaccine, Cervarix, should be on the market in the U.S. in 2008, and just-approved breast cancer treatment Tykerb will be stealing market share from Genentech's
Forward-looking investors will notice that, as of February, GSK had 158 projects in clinical trial testing. A fifth of these are either in phase 3 studies or awaiting approval decisions. This is the most robust drug pipeline in the industry. The 31 projects that GSK has in phase 3 testing or awaiting regulatory decision is over three times the number that Pfizer
Continuing with the relative comparisons, GSK's operating income was nearly the same as Pfizer's in 2006, yet GSK's market cap is nearly 20% lower than Pfizer's. In addition, GSK will not be suffering from the same generic challenges as Pfizer will in the coming years. Either Pfizer is still overvalued or GSK is undervalued based on relative comparisons.
Shares of GSK are cheap after the excessive share price decline on the Avandia worries. The stock is trading at 14 times trailing-12 month-earnings and yielding nearly 4%. In the most recent quarter, earnings grew at double-digit percentages. This should continue in the future once Cervarix, Tykerb, and other compounds start ramping up sales.
The last pharma to have such an unwarranted drop in its shares was Merck in 2006. Investors who bought in when the pessimism over Vioxx was the greatest are sitting on more than 100% returns right now. The drop in shares of GSK on the fears over Avandia hasn't been quite as large, but has still elicited a similar buying opportunity for long-term investors.
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Fool contributor Brian Lawler does not own shares of any company mentioned in this article. Pfizer is an Inside Value recommendation. GlaxoSmithKline is an Income Investor selection. The Fool has a disclosure policy.
