GlaxoSmithKline’s (LSE: GSK) shares have been on fire this week, outpacing the wider FTSE 100 by more than 3% over the past five days.
This strength has been a result of renewed merger speculation, which has been surrounding the company for some time. Rumours circulated earlier in the week that Pfizer, the US pharmaceutical giant that tried and failed to buy AstraZeneca last year, is putting together a £19-per share bid for Glaxo.
Pfizer has yet to confirm or deny these rumours, although analysts have been speculating that Pfizer will make an offer for Glaxo for around a year now. So far, no bid has emerged, and it’s unlikely an offer will be made this time.
However, Pfizer isn’t the only company that’s been cited as having an interest for Glaxo. There’s also talk that Swiss pharma giant Novartis, which bought Glaxo’s oncology operation for $16bn last year, could make a bid for the UK group. That said, it’s believed that Novartis will only make an offer if peer Roche was to agree to buy parts of Glaxo after a deal.
Nothing’s certain
There’s no guarantee that Pfizer or Novartis will make an offer for Glaxo in the near future. As you come to realise, many of the market’s takeover rumours never mature, and it’s likely that this rumour has no weight behind it.
But there is a chance that Glaxo could be acquired by a larger peer over the long term. You see, Glaxo has the best pipeline of treatments under development within the pharmaceutical industry. Indeed, the group has 258 new products in its pipeline, 40 of which are in advanced clinical trials. Management expects at least half of these drugs will be on the market by 2020.
And as many big pharma groups are now buying up growth, rather than building it themselves, Glaxo’s sector-leading pipeline could be too good to pass up.
What’s more, Glaxo is one of the cheapest companies in the big pharma group.
Undervalued
Glaxo’s peers, including the likes of Novartis, Pfizer, Roche and Sanofi all trade at an average forward P/E of 22.2. Glaxo trades at a forward P/E of 17.5. What’s more, based on City earnings estimates for 2016 and 2017, Glaxo is currently trading at a valuation discount of 25% to its wider peer group.
Other valuation metrics also show the same kind of discount. Using the enterprise value to earnings before interest and tax or EV/EBIT metric, Glaxo is trading at a discount of 25% to its wider peer group on both a forward and current basis. Glaxo’s shares are clearly a steal at present levels.
As Glaxo is trading at such a wide discount to the rest of its peers group, and the company has one of the best treatment pipelines in the group, it can only be a matter of time before a larger peer swoops on the company.
Also, Glaxo currently supports a dividend yield of 5.5% so investors will be paid to wait for an offer.
