Summary
Glaxo's recent asset swap with Novartis will change the composition of its future revenue stream. The vaccine and consumer health division will be further strengthened. The above two divisions are virtually annuity like, hence lowering GSK's overall risk profile.
The healthcare industry in my view is best classified as a dependable, recession proof industry due to the consistent demand for their end products. The industry holds particular appeal to conservative long term investors due to the stable, predictable nature of their revenue and earnings stream. The consistent revenue stream generates excess capital that tends to be returned to shareholders in the form of dividends.
GlaxoSmithKline Plc ( GSK) neatly falls into the above definition with their diverse divisions ranging from immunizations to consumer goods such as Aqua fresh toothpaste. The article below will discuss the recent asset swap conducted with Novartis ( NVS). I will also analyze how the asset swap will further strengthen GSK's ability to pay out higher dividends going forward.
The research based drug discovery companies are undergoing a revolutionary change with assets being swapped to focus on "core" franchises due to the high cost of drug development. We have seen a flurry of deals in this space, beginning with Bristol Myers Squibb (AstraZeneca ( BMY) sale of its diabetes division to its partner AZN). There are the ongoing negotiations between multiple suitors for Merck ( MRK) consumer division along with the recently announced NVS deals. NVS has divested its animal health division to Eli Lilly ( LLY) for 5.4 billion dollars along with the transformational swap of assets with GSK.
Under the terms of the deal, GSK will sell its oncology division to NVS for $14.5 billion dollars along with $1.5 billion in milestone payments. GSK will acquire NVS vaccine business excluding its flu portfolio for $5.25 billion dollars along with a milestone payment of roughly $1.8 billion dollars. NVS and GSK would then combine their consumer division into a joint venture with GSK retaining 63.5% of the combined entity.
Let's examine the above mentioned deals by NVS. NVS significantly lagged its two main competitors in the animal health space, Zoetis ( ZTS) and Elanco Animal Health a division of LLY. NVS decided to focus its resources in areas where it has a clear competitive advantage such as oncology, thus necessitating the sale of this division. In the vaccine field, GSK is a clear leader with a strong slate of current vaccines along with significant potential assets in various phases of clinical trials. An assets swap would allow each company to focus on their particular field of expertise, further strengthening their "franchise". The question left for a current GSK investor is how will the company change now that the asset swaps have been agreed to?
In their most recent annual report, GSK breaks down their sales into three divisions dubbed pharmaceuticals, vaccines and consumer health. I would like to begin with the vaccine division which constitutes 13% of GSK total sales. Sir Andrew Witty CEO of GSK has dubbed vaccines in general as an annuity type business with long term prospects. The following video interview courtesy of CNBC neatly sums up his thoughts. I encourage all to take the time and watch this short clip, it is quite informative. Demand for vaccines tends to be stable and rather predictable, which allows for accurate modeling of demand and sales. Due to the predictable, steady nature of vaccine sales, the division exhibits annuity type characteristics. The division has some growth potential outside the merger as NVS acquired meningitis B vaccine Bexsero has been granted breakthrough therapy designation by the FDA.
The consumer health division registered sales of over $8 billion dollars, which accounted for 20% of GSK's total sales for 2013. The addition of NVS consumer unit which registered sales of roughly $4 billion dollars, should help make the combined entity a force to be reckoned with in the consumer health. NVS portfolio neatly fills in the gaps in GSK portfolio with well known brands such as Excedrin, Lamisil, Benefiber and Otrivin. Product overlap is absent in the combined entity, so cannibalization of sales shouldn't be an immediate worry. The strengthening of the combined entity will allow for greater leverage with retailers. I view the consumer health division as an annuity type business as well. I estimate at minimum, 35% of GSK annual revenue will consist of predictable annuity like divisions. That leaves the largest revenue generator being the pharmaceutical division which I will detail below.
The pharmaceutical division's largest revenue generator continues to be the respiratory franchise, which makes up roughly 40% of sales. GSK flagship product continues to be Advair, a combination of an inhaled steroid with a long acting beta agonists in a powder form, delivered via a unique delivery device termed the diskus. I mention all this due to the fact that its unique delivery mechanism has isolated it from generic competition. The FDA has failed to issue guideline to potential generic manufacturers. The continued delay has given management confidence that a generic competitor won't emerge before 2016. In the interim, the delay will give GSK ample opportunity to market its two new remedies dubbed Breo and Anoro which will be delivered via the unique delivery device known as Ellipta. The initial demand for Breo has been delayed due to poor coverage via Medicare part D coverage. The CEO acknowledged this during the recent conference call.
"With the launch of Breo though it's given us obviously the opportunity to get in and start to negotiate those contracts. And I'm delighted that as of today, we now have 70% coverage in Medicare Part D for Breo. That compares to only 3% on January the 1st, very substantial improvement. I expect the sales for Breo will begin to trend up as the product gains coverage and prescribers begin to use the product on their patients. Anoro was just recently launched with much better coverage than Breo began with. "Anoro was launched last week. Its anecdotal feedback is extremely good, very promising. And I'm also delighted that we've already been able to secure the first of our Medicare Part D contracts. That clearly is very significant contrast to the Breo situation. I think it reflects a more convenient timing for launch in terms of the calendar of contract negotiations and also of course reflects the fact that Anoro was a first-in-class new product into the US.
I anticipate the sales expected from Breo and Anoro will help offset the decline in sales that can be expected once Advair faces generic competition. I expect future revenue growth to be fueled by new pharmaceutical products such as Tivicay for HIV and Tanzeum for diabetes along with price increases from the vaccine and consumer health divisions. The following quote sums up management's expectations for earnings per share growth for 2014.
"EPS guidance remains unchanged at 4% to 8% for the year. We expect to grow sales little less clear exactly the rate of sales growth given some of the dynamics that we're seeing open up during the year particularly the early approval of Lovaza combined with some of the price pressure we're seeing in the US. Nonetheless, we feel confident to deliver sales growth and very confident to deliver an EPS within the range of 4% to 8%. 2014 Dividends$0.75 2013 Dividends$2.41 2012 Dividends$2.48 2011 Dividends$2.21 2010 Dividends$2.00 2009 Dividends$1.85 2008 Dividends$2.14 (click to enlarge)
GSK data by YCharts
As we can see from the table above, GSK has managed to raise its dividend in a rather uneven fashion since 2008. The dividend was lowered quite a bit in 2009 due to patent expirations and currency fluctuations. Since that time, GSK has amply rewarded shareholders as we can see from the table above. The actual dividend payment has gone up over the last 3 quarters as compared to the same quarter the year before. GSK has been returning a greater percentage of earnings to shareholders, which further add to the appeal of the shares. Once the proposed asset swap with NVS is completed in 2015, I expect GSK earnings to be further strengthened, allowing for the continued upward trajectory in the dividend received. By increasing the percentage of revenue from more stable sources such as vaccines and consumer health will allow GSK to distribute dividends in a more predictable manner.
In a move that may add to the available funds to be paid out to shareholders via dividends, is the announcement by GSK to return roughly $6.7 billion via the repurchase of shares outstanding once the deal is consummated in 2015. By reducing the shares outstanding, the funds earmarked for dividends will be allocated to a smaller share base leading to a higher amount received per share. GSK has proven itself to be a shareholder friendly company, hence the risk of the above scenario not playing out is rather minimal. I continue to remain long in GSK, and I am quite content to reinvest the dividend once received. Thanks for reading and I look forward to your comments.
Original Post By: http://ift.tt/1q7KPo2
Source : http://ift.tt/1q7KPo2
Glaxo's recent asset swap with Novartis will change the composition of its future revenue stream. The vaccine and consumer health division will be further strengthened. The above two divisions are virtually annuity like, hence lowering GSK's overall risk profile.
The healthcare industry in my view is best classified as a dependable, recession proof industry due to the consistent demand for their end products. The industry holds particular appeal to conservative long term investors due to the stable, predictable nature of their revenue and earnings stream. The consistent revenue stream generates excess capital that tends to be returned to shareholders in the form of dividends.
GlaxoSmithKline Plc ( GSK) neatly falls into the above definition with their diverse divisions ranging from immunizations to consumer goods such as Aqua fresh toothpaste. The article below will discuss the recent asset swap conducted with Novartis ( NVS). I will also analyze how the asset swap will further strengthen GSK's ability to pay out higher dividends going forward.
The research based drug discovery companies are undergoing a revolutionary change with assets being swapped to focus on "core" franchises due to the high cost of drug development. We have seen a flurry of deals in this space, beginning with Bristol Myers Squibb (AstraZeneca ( BMY) sale of its diabetes division to its partner AZN). There are the ongoing negotiations between multiple suitors for Merck ( MRK) consumer division along with the recently announced NVS deals. NVS has divested its animal health division to Eli Lilly ( LLY) for 5.4 billion dollars along with the transformational swap of assets with GSK.
Under the terms of the deal, GSK will sell its oncology division to NVS for $14.5 billion dollars along with $1.5 billion in milestone payments. GSK will acquire NVS vaccine business excluding its flu portfolio for $5.25 billion dollars along with a milestone payment of roughly $1.8 billion dollars. NVS and GSK would then combine their consumer division into a joint venture with GSK retaining 63.5% of the combined entity.
Let's examine the above mentioned deals by NVS. NVS significantly lagged its two main competitors in the animal health space, Zoetis ( ZTS) and Elanco Animal Health a division of LLY. NVS decided to focus its resources in areas where it has a clear competitive advantage such as oncology, thus necessitating the sale of this division. In the vaccine field, GSK is a clear leader with a strong slate of current vaccines along with significant potential assets in various phases of clinical trials. An assets swap would allow each company to focus on their particular field of expertise, further strengthening their "franchise". The question left for a current GSK investor is how will the company change now that the asset swaps have been agreed to?
In their most recent annual report, GSK breaks down their sales into three divisions dubbed pharmaceuticals, vaccines and consumer health. I would like to begin with the vaccine division which constitutes 13% of GSK total sales. Sir Andrew Witty CEO of GSK has dubbed vaccines in general as an annuity type business with long term prospects. The following video interview courtesy of CNBC neatly sums up his thoughts. I encourage all to take the time and watch this short clip, it is quite informative. Demand for vaccines tends to be stable and rather predictable, which allows for accurate modeling of demand and sales. Due to the predictable, steady nature of vaccine sales, the division exhibits annuity type characteristics. The division has some growth potential outside the merger as NVS acquired meningitis B vaccine Bexsero has been granted breakthrough therapy designation by the FDA.
The consumer health division registered sales of over $8 billion dollars, which accounted for 20% of GSK's total sales for 2013. The addition of NVS consumer unit which registered sales of roughly $4 billion dollars, should help make the combined entity a force to be reckoned with in the consumer health. NVS portfolio neatly fills in the gaps in GSK portfolio with well known brands such as Excedrin, Lamisil, Benefiber and Otrivin. Product overlap is absent in the combined entity, so cannibalization of sales shouldn't be an immediate worry. The strengthening of the combined entity will allow for greater leverage with retailers. I view the consumer health division as an annuity type business as well. I estimate at minimum, 35% of GSK annual revenue will consist of predictable annuity like divisions. That leaves the largest revenue generator being the pharmaceutical division which I will detail below.
The pharmaceutical division's largest revenue generator continues to be the respiratory franchise, which makes up roughly 40% of sales. GSK flagship product continues to be Advair, a combination of an inhaled steroid with a long acting beta agonists in a powder form, delivered via a unique delivery device termed the diskus. I mention all this due to the fact that its unique delivery mechanism has isolated it from generic competition. The FDA has failed to issue guideline to potential generic manufacturers. The continued delay has given management confidence that a generic competitor won't emerge before 2016. In the interim, the delay will give GSK ample opportunity to market its two new remedies dubbed Breo and Anoro which will be delivered via the unique delivery device known as Ellipta. The initial demand for Breo has been delayed due to poor coverage via Medicare part D coverage. The CEO acknowledged this during the recent conference call.
"With the launch of Breo though it's given us obviously the opportunity to get in and start to negotiate those contracts. And I'm delighted that as of today, we now have 70% coverage in Medicare Part D for Breo. That compares to only 3% on January the 1st, very substantial improvement. I expect the sales for Breo will begin to trend up as the product gains coverage and prescribers begin to use the product on their patients. Anoro was just recently launched with much better coverage than Breo began with. "Anoro was launched last week. Its anecdotal feedback is extremely good, very promising. And I'm also delighted that we've already been able to secure the first of our Medicare Part D contracts. That clearly is very significant contrast to the Breo situation. I think it reflects a more convenient timing for launch in terms of the calendar of contract negotiations and also of course reflects the fact that Anoro was a first-in-class new product into the US.
I anticipate the sales expected from Breo and Anoro will help offset the decline in sales that can be expected once Advair faces generic competition. I expect future revenue growth to be fueled by new pharmaceutical products such as Tivicay for HIV and Tanzeum for diabetes along with price increases from the vaccine and consumer health divisions. The following quote sums up management's expectations for earnings per share growth for 2014.
"EPS guidance remains unchanged at 4% to 8% for the year. We expect to grow sales little less clear exactly the rate of sales growth given some of the dynamics that we're seeing open up during the year particularly the early approval of Lovaza combined with some of the price pressure we're seeing in the US. Nonetheless, we feel confident to deliver sales growth and very confident to deliver an EPS within the range of 4% to 8%. 2014 Dividends$0.75 2013 Dividends$2.41 2012 Dividends$2.48 2011 Dividends$2.21 2010 Dividends$2.00 2009 Dividends$1.85 2008 Dividends$2.14 (click to enlarge)
GSK data by YCharts
As we can see from the table above, GSK has managed to raise its dividend in a rather uneven fashion since 2008. The dividend was lowered quite a bit in 2009 due to patent expirations and currency fluctuations. Since that time, GSK has amply rewarded shareholders as we can see from the table above. The actual dividend payment has gone up over the last 3 quarters as compared to the same quarter the year before. GSK has been returning a greater percentage of earnings to shareholders, which further add to the appeal of the shares. Once the proposed asset swap with NVS is completed in 2015, I expect GSK earnings to be further strengthened, allowing for the continued upward trajectory in the dividend received. By increasing the percentage of revenue from more stable sources such as vaccines and consumer health will allow GSK to distribute dividends in a more predictable manner.
In a move that may add to the available funds to be paid out to shareholders via dividends, is the announcement by GSK to return roughly $6.7 billion via the repurchase of shares outstanding once the deal is consummated in 2015. By reducing the shares outstanding, the funds earmarked for dividends will be allocated to a smaller share base leading to a higher amount received per share. GSK has proven itself to be a shareholder friendly company, hence the risk of the above scenario not playing out is rather minimal. I continue to remain long in GSK, and I am quite content to reinvest the dividend once received. Thanks for reading and I look forward to your comments.
Original Post By: http://ift.tt/1q7KPo2
Source : http://ift.tt/1q7KPo2