New Valuations

GlaxoSmithKline PLC(NYSE:GSK) Emerging markets are yielding strong revenue growth (+25% y-o-y in 3Q 09) for GSK, with strategic alliances creating increasing opportunities. The alliance with Dr. Reddy’s Laboratories to market quality branded pharmaceuticals is expected to provide a healthy revenue stream for GSK and also offers GSK, which has primarily concentrated on patented products, a foothold in the branded generics business. In November 2009, GSK’s CEO Andrew Witty sought to stem concerns over patent expiry of Advair; arguing that it is unlikely to face early generic competition or pure substitution competition. Consequently, he expects a continued significant contribution to GSK past patent expiry. Over the next 3 quarters, revenues will benefit from outstanding orders for vaccines and influenza products, while FDA approval of Cervarix provides a huge opportunity to cater to the US market. The predominance of late stage products such as Horizon (COPD), Avodart (prostate cancer), MenHibrix (Meningitis, US), Arzerra (cancer) and Benlysta (lupus) is expected to augment top-line in the medium term while increasing advertising costs, going forward. Moreover we continue to anticipate higher Research and Development (R&D) expenses, with a focus on the product pipeline and several products currently in stage 3. We also anticipate margins to be depressed by the increase in the proportion of relatively low margin vaccine sales and higher sales in emerging markets in the near term. However, GSK’s restructuring measures will continue to reap benefits going forward. Although big-ticket acquisitions have been ruled out, we expect the company to utilize its strong cash position in acquiring small to mid-size companies in emerging markets with strong product portfolios or pharmaceutical companies with a strong R&D pipeline.

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