This week’s news that the UK’s Serious Fraud Office (SFO) has opened a formal criminal investigation into pharmaceutical company GlaxoSmithKline’s (LSE: GSK) (NYSE: GSK.US) commercial practices places the firm’s investors in an uncomfortable place.
The situation comes on top of last year’s a revenue collapse in China, a region where the company is under the regulatory spotlight for misconduct.
Still turning?
The embattled drug firm has been fighting to turn its fortunes around and aims to diversify its business, create more value products, and to simplify its operating model. Revenue figures were flat in 2012 and in 2013, and look like being down in 2014. A tsunami of generic competition has driven down selling prices for some of the firm’s best-sellers that have timed-out on exclusivity. Even drugs under patent protection face competition from other producers’ alternatives.
In last month’s trading update, the CEO points to the emergence of new products in the lines of Respiratory and HIV, and a deal with Novartis, as evidence of progress. City analysts following the firm’s fortunes expect earnings to rise by about 10% during 2015, so it looks like many believe the firm is starting to turn the tide.
Valuation
To muddy the valuation picture, there’s been a lot of excitement in the pharmaceutical sector lately thanks to Pfizer’s takeover approach for AstraZeneca. It wouldn’t surprise me if that situation has helped to keep GlaxoSmithKline’s share price firm, as investors hope and speculate that GlaxoSmithKline might attract takeover interest.
At a share price of 1618p, the forward P/E rating is running at about 14 for 2015. The forward dividend yield is sitting at around 5.2% and city forecasters expect forward earnings to cover that payout about 1.4 times.
What now?
So, given the negative news surrounding GlaxoSmithKline, we might expect the shares to be selling cheap. However, I think the current valuation looks fair, which presents some downside risk given the uncertain outcome of the SFO’s investigation.
