Can Glaxo Crank Up the Excitement?


By Amy Tsao When GlaxoSmithKline (GSK) reports its fourth-quarter results on Feb. 10, investors aren't expecting much in revenue or income gains. Sales aren't projected to rise a lot from 2003's $38 billion, and earnings are seen advancing just 4%, to $4.7 billion, or $2.79 per share, up from $4.5 billion, or $2.67 per share earned a year ago.

Instead, the focus will be on the British drugmaker's comments regarding its pipeline, which contains several possible blockbuster products - for cancers, cardiovascular health, and osteoporosis - that are in late-stage testing or in the process of being reviewed by the U.S. Food & Drug Administration. "Everyone is looking to the pipeline as a source of excess returns over the next year," says Gbola Amusa, global pharmaceutical industry analyst at Bernstein Research in London.

REASONS TO BE CHEERFUL. So, any hint that 2005 will be stronger than Wall Street expects could be the spark this stock is searching for. Still, analysts polled by First Call anticipate only modest improvement. On average, they now forecast 2005 revenues will rise by 4%, to $39.9 billion, and per-share profits will climb by 8%. But Glaxo's share price has lagged, anyway: The American depository receipts (ADRs) have been basically flat at $45 apiece over the past 12 months.

That's partly because Glaxo has disappointed Wall Street in the past. Even though it has the fullest product pipeline of any of the world's major pharmas, its ability to deliver new hits has fallen well short of analysts' hopes. "When a company like Novartis (NVS) produces [promising data in drug trials], analysts build in big expectations for the company," says Amusa. "When Glaxo does the same thing, analysts ignore it."

Getting over this reputation for underwhelming investors won't be easy, but some analysts see reason to be optimistic. That's because some key products are finally close to reaching the market. Examples include a cancer drug called Lapatinib, a vaccine for the virus that causes cervical cancer, and a drug that inhibits a recently discovered marker of cardiovascular risk. All of these drugs have the potential to be "mega-blockbusters," says Amusa.

IMMINENT DEAL? Wall Street will also be looking for signs that Glaxo's most important existing product, asthma drug Advair, is still growing at a double-digit clip. Over the past year, the company has faced lower revenues amid generic competition on big products like antidepressants Paxil and Wellbutrin, and allergy drug Flonase. Sales of Advair, however, are still expected to increase by 15% in 2004, to about $4.8 billion.

The other burning question is whether Glaxo, known to be highly acquisitive, will soon buy British rival AstraZeneca (AZN). A 20% decline in AstraZeneca's share price in the past 12 months is increasing speculation that a combination is imminent, analysts say. If a deal were made, Glaxo would have to divest certain products, but analysts say the savings in operating costs could be worth those sacrifices over the longer term.

Skeptics doubt that any big improvement in Glaxo's fortunes is imminent. "It will still take a while, maybe another two years, to show the fruits from its pipeline," says Mehta Partners analyst Shao Jing Tong, who's neutral on the stock. He expects it to trade around its current $45 level for the next year to two years. Is he too pessimistic? Wall Street may well get its first clues with the Feb. 10 earnings announcement. Tsao is a reporter for BusinessWeek Online in New York


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