3 Reasons Why GSK Could Be Ripe For Takeover

By Peter Stephens, writing for The Motley Fool
For original article, please go to: http://bit.ly/1v4sbLY


Life as an investor in GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) is tough at the moment. That’s because shares in the pharmaceutical major have fallen by 10% in the last three months alone. Indeed, since the start of 2012, shares in GlaxoSmithKline are down 4%, while the FTSE 100 is up 18% over the same time period.

Looking ahead, though, GlaxoSmithKline could have a bright future. In fact, it could be ripe for takeover and here are three reasons why that may be the case.

Low Valuation

After being on the end of multiple bribery allegations in recent months, sentiment in GlaxoSmithKline has weakened severely. This has pushed shares downwards and means that GlaxoSmithKline now trades on a very low valuation.

For instance, its price to earnings (P/E) ratio is just 14.9 and its dividend yield is 5.7%. While the latter is undoubtedly impressive at first glance, the former may seem less so at a time when the FTSE 100 has a P/E ratio of just 13.4. However, when you consider that AbbVie bid for pharmaceutical peer Shire recently when it was trading on a P/E of above 20, you can see that, on a relative basis, GlaxoSmithKline seems to offer great value for money.

An Impressive Pipeline

Although sentiment in GlaxoSmithKline is weak at the moment, in the long run the success or failure of pharmaceutical stocks tends to be reliant upon their pipelines. In this respect, GlaxoSmithKline has huge potential and, moving forward, this could be a major positive for a potential buyer.

Furthermore, GlaxoSmithKline continues to increase focus on its pipeline, with the sale of consumer brands such as Ribena and Lucozade turning the business into a pure pharmaceutical play. For sector peers, this makes the company even more appealing, since the development of new, blockbuster drugs is where the potential for strong sales growth is most prevalent.

Recent Chinese Fine

Although clearly negative in the short run, GlaxoSmithKline’s recent £300 million fine for alleged bribery in China could help to encourage bids for the company. In other words, while the investigation was ongoing, a bid was less likely as there was greater uncertainty surrounding the company’s future. So, now that it has been fined, GlaxoSmithKline can, to an extent, draw a line under the Chinese bribery allegations and move ahead with developing more blockbuster drugs. This increased certainty, plus a low valuation and impressive pipeline, could mean a bid is much more likely.

Company website: www.directmarkettouch.com

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