The patent cliff has paid a visit to nearly every major pharma in the past few years. As a result, we've seen major changes sweeping across the sector, leading to the development of new breakthrough therapies, consolidations of product pipelines through mergers, and a handful of so-called tax inversions.
While some big pharmas have been able to navigate the loss of former star drugs relatively unscathed by taking such measures, we've seen others fall on hard times.
The U.K. pharma giant GlaxoSmithKline (NYSE:GSK) is one such company that has struggled to overcome the loss of exclusivity for top-selling drugs like Advair. And because newer drugs designed to replace Advair in the respiratory drug space have failed to take flight so far, Glaxo's stock has drastically under-performed the broader markets this year, shown by the chart below.
With many big pharmas posting strong gains upon turning the patent cliff corner, I think it's worthwhile to consider whether Glaxo could be a turnaround story in the near future as well. So, here's a look at Glaxo's valuation in respect to other major pharmas and the company's growth prospects moving forward.
Is GlaxoSmithKline undervalued following this price drop?
With a market cap of $113.4 billion, Glaxo is presently the 7th largest public biopharma company in the world, dropping two spots compared to a year ago.
A comparison of the price-to-earnings ratios for GlaxoSmithKline and several of its peers shows that the market has been applying the smallest premium to Glaxo's earnings since the start of the year.
Glaxo looks pretty undervalued relative to other biopharmas in the same weight class on a P/E basis.
So, is it time to buy GlaxoSmithKline stock?
Before doing so, I think it's important to consider why the market isn't applying a richer premium to the company's earnings. Glaxo is facing three major issues that are creating uncertainty regarding the company's future top- and bottom-line growth.
From a top-line view, Glaxo is having trouble getting payers on board for its newer respiratory drugs like Breo Ellipta and is therefore unable to slow the inevitable erosion of market share in this valuable space. The company could also get hit with a multibillion-dollar fine stemming from the ongoing bribery investigations in a number of emerging markets, which would hamper the bottom line somewhere down the road.
On a final note, Glaxo hasn't been able to advance any of its potential blockbuster candidates past late-stage trials recently. For example, its closely watched lung cancer vaccine MAGE-A3 failed in a second late-stage trial last May, prompting the company to sell off its remaining oncology assets. Amgen, by contrast, is closing in on a regulatory approval for its novel high cholesterol treatment known as evolocumab. And Sanofi is doing the same with its competing cholesterol treatment dubbed alirocumab.
In short, the trifecta of falling revenues, clinical failures, and potential regulatory fines are weighing heavily on Glaxo's outlook these days.
Glaxo' strong brand name and its noteworthy dividend yield of 5.51% make it a stock worth putting on your watchlist. However, the various headwinds facing the company, however, suggest that the stock could fall even further. So until some or most of these outstanding issues are resolved, I think it's best to look elsewhere for income and growth within the healthcare sector.
George Budwell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.