There’s deep value in GlaxoSmithKline, says City broker

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GlaxoSmithKline PLC (LON:GSK) has “deep value” and the implied negative pipeline value is unwarranted, said a City broker.

The pharma giant is hosting an investor event next week where management is expected to provide discussion about the growth outlook for the next five to ten years, confirm the extent of the proposed 2022 dividend cut and confirm the route and timing of the Consumer exit.

READ: GlaxoSmithKline snaps up promising cancer treatment ahead of crunch investor day

“Clear communication from management will be critical in order to convince many sceptical yet intrigued investors that now is the time to buy,” said Berenberg, which retains a ‘buy’ stance on the stock.

The broker forecast 5% sales and 10% adjusted operating profit annual growth over the next five years compared to consensus at 5% and 8% respectively.

Investors are wondering whether the FTSE 100 group will manage to fill the £3bn sales hole after the loss of exclusivity of HIV medication dolutegravir in 2028, which analysts at Berenberg say will also cause lost profits of £1.8bn.

If the pipeline is to close the gap and retain 4% sales growth per annum, the team will have to deliver at least two megabuster assets to market by the middle of the decade.

Analysts noted that there are at least four Phase 2/3 pipeline “gold star assets” that have the potential to fit the bill.

The dividend cut could facilitate more business development, with Berenberg expecting a 50% in aggregate, leaving the Biopharma business with a 40% payout ratio and a 3% yield.

“The remaining unallocated cash accumulates to £2bn by 2023 which could enable management to supplement the internal pipeline with one to two external assets within the next two years,” analysts said.

Shares were flat at 1,413.97p on Tuesday late morning.

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