GlaxoSmithKline (LSE: GSK) rose modestly this week following upbeat quarterly results and news that the drugs maker was considering a spin-out of ViiV Healthcare, its HIV medicines business. Glaxo also announced disposals of unwanted assets. Its stock is up about 6% this year, but has been outperformed by Shire by almost two percentage points. Here’ s why investors will likely continue to pay up for Shire (LSE: SHP), while Glaxo may be the laggard in 2015, although decent capital gains should be on the cards.
Shire Rocks
As I also argued in early January, when Shire traded at 4,560p, I’d add Shire to a diversified portfolio if I wanted exposure to the pharma industry. In fact, Shire is very likely to outperform both Glaxo and AstraZeneca for some time, based on several factors, in my view. I am attracted to Shire because it has been much more aggressive than its rivals in its corporate strategy, as its latest purchase of NPS Pharmaceuticals signals. Shire is exploiting its balance sheet at a time other pharma players have been more cautions managing their finances — at least until now.
The average price target from brokers has risen by 60% in the last 12 months, and it looks like the shares may continue to rally, particularly since they currently price in only a small takeover premium in the region of 3%/5%, according to my calculation. At 4,947p, the stock trades at about 16x forward earnings. It is not incredibly cheap, but is not expensive, either. Of course, you wouldn’t buy Shire now for its dividend prospects.
More To Come At Glaxo?
Glaxo has all it takes be an attractive equity investment, but for the time being it’s just a boring dividend play. Its recent deal with Novartis and its conservative corporate strategy bring more questions than answers, as banking sources have recently pointed out.
Quarterly results were decent — just. Revenues from its troubled respiratory portfolio should return to growth next year, although market conditions are tough in the US. Glaxo announced on Wednesday it had agreed to sell on the market a 7.9% stake in Danish cancer drug developer Genmab for about $300m, which is a step in the right direction following its partnership with Novartis.
But investors need more to pay up for the stock.
“GlaxoSmithKline has taken the first firm step towards a partial spin-off of its HIV drugs business by appointing investment banks to advise on what would potentially be the biggest initial public offering in pharmaceuticals industry history,” the Financial Times reported on Wednesday.
Banking sources have confirmed the report, suggesting the spin-off could be arranged sooner than expected, however, and “possibly as early as this year,” according to one banker involved in the deal. “If the markets are stable, expect Glaxo to be pushed by its bankers to float the unit between the third and fourth quarter.”
Personally, I think that the division could easily be worth more than $20bn.
