In the search for a top pharmaceutical stock to buy, GlaxoSmithKline Plc. (NYSE: GSK) might seem an unlikely candidate at first glance.
The GSK price slid from a high of more than $56 in 2014 to about $35 at the end of 2017, and it has only partially recovered to about $40 since. In fact, shares of this UK-based drug giant have underperformed the global pharma and biotech sector by 60% over the past decade.
In recent years, the company's strategy has seemed confused.
For instance, GlaxoSmithKline sold its oncology drug portfolio to Novartis AG (NYSE: NVS) for $16 billion back in 2014. Just two years later, the company started rebuilding its oncology drug pipeline, both internally with research and development (R&D) spending and through acquisitions such as the December 2018 purchase of Tesaro Oncology for $5.1 billion.
CEO Emma Walmsley, who took over in April 2017, has replaced more than 100 of her top 125 managers and killed one-third of the experimental drugs the company had in development.
It's no wonder investors have been unimpressed. But it's time to take a closer look.
All the apparent chaos is in fact a transition into a leaner, more focused company - a company with plenty of upside potential.
And one of the best clues we have for why Glaxo is a top stock to buy is its high Money Morning Stock VQScore™ of 4.8, which is well into our "Buy Zone."
Here's why this pharma company is on track for a major rebound...
How GlaxoSmithKline Became a Top Stock to Buy
The management overhaul is part of Walmsley's plan to re-energize GSK's corporate culture with fresh blood. About one-third of the new hires have come from outside the company.
The renewed concentration on oncology drugs has yielded three promising candidates. Two were acquired via the Tesaro deal and are designed to treat ovarian cancer and endometrial cancer. Another, which treats multiple myeloma, a type of bone marrow cancer, was developed in-house.
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In addition to oncology, GSK has had recent success with new vaccines as well as drugs that treat HIV.
Such successes reflect Glaxo's larger shift in its drug development process. Instead of "consensus" decision-making, now just one person decides which drugs get developed - and which get jettisoned.
The company has plans to narrow down to just four therapeutic areas: oncology, immuno-inflammation, respiratory diseases, and infectious diseases. It plans to divest its rare disease unit and trim its consumer group by more than 130 brands.
We're already seeing signs that Walmsley's turnaround plan is working. In its most recent earnings report, Glaxo beat expectations on earnings per share with a bottom line of $0.78 versus the forecast for $0.64. Sales were $9.76 billion, besting expectations for $9.55 billion.
Two of the areas of focus showed particularly strong results. Vaccine sales were up 23% year over year and respiratory sales increased 12%.
But what's most exciting here are two major strategic moves that promise long-term payoffs...
The Two Biggest Reasons to Buy GSK Stock
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The first strategy involves "Big Data" analytics, or artificial intelligence. GSK is restructuring its R&D to take advantage of the still-developing ability to assimilate, process, and analyze massive amounts of data to make the drug development process more efficient.
"The most impactful way any company will change its performance is making the timelines shorter, the costs lower, and the probability of success higher," Walmsley told Bloomberg News.
Artificial intelligence (AI) and machine-learning provide "a real chance of improving the productivity of an R&D organization," she said. To that end, Glaxo already has AI partnerships with several other companies, including genetic-testing company 23andMe Inc.
The goal is to reduce wasteful spending on dead-end treatments while doubling the success rate of its drug pipeline from the industry average of about 10% to 20%.
"Drug development is a long, costly, and highly risky proposition," said Money Morning Executive Editor William Patalon, III, who recently recommended GlaxoSmithKline to subscribers of his Private Briefing newsletter. "But Glaxo has found a kind of 'shortcut' that helps 'de-risk' drug development. It's made AI a centerpiece of its drug-development strategy."
In another bold move, Walmsley is also forging a consumer health joint-venture with Pfizer Inc. (NYSE: PFE) to sell over-the-counter medicines. Announced in December, the deal closed Aug. 1. Glaxo intends to spin off this division, to be known as GSK Consumer Healthcare, within three years.
The move serves several purposes. It will off-load some debt onto the cash-rich consumer business. And it will help Glaxo focus resources on its prescription drug business, which is Walmsley's primary goal.
Glaxo will have a 68% controlling stake in the new company, giving it control of the board as well as the timing of the spin-off, which will eventually be listed as a stock separate from both parent companies.
Patalon says that if operating profit margins reach 25% and sales total $15.6 billion by 2022, operating profits could be nearly $4 billion, making the business worth more than $50 billion.
Owners of GSK stock will end up with shares in both companies. And given the history of spin-offs, that should translate to higher returns.
"I like spin-offs because they're one of the single most profitable transactions for investors to play," Patalon said. "A number of institutional and academic research studies show that spin-off stocks trounce the general market averages for as long as three years after the transaction. And many spin-off companies are ultimately taken over at hefty premiums to their market price. Frankly they're about as close to being 'free money' as you'll find in the modern stock market."
Given the years-long time horizon of these strategies, GlaxoSmithKline is definitely a long-term play - you'll need to exercise patience to collect your profits. But Glaxo's plump 4.53% dividend yield means you will be paid while you wait.
Robert Herjavec: Indisputable Proof That Anybody Can Get Rich Through Angel Investing
When Neil Patel launched the Angels & Entrepreneurs Summit, he had only planned to invite a small group of guests to join him and guest "Shark" Robert Herjavec... but then Neil revealed something truly shocking.
During this clip (about halfway through the event), he reveals indisputable proof that anybody can transform their life through angel investing.
We knew we had to show this event to everyone - the information is just too valuable to keep under wraps.
You owe it to yourself to watch this right now.
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About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.