High-yielding GlaxoSmithKline makes multi-month high

It's not plain sailing for Glaxo, but these third-quarter results have attracted buyers. Richard Hunter, head of markets at interactive investor, runs through the important bits.

The update from GlaxoSmithKline has, unsurprisingly, been well received, given the number of improvements peppered throughout.

The long-term potential of the sector is not in question, as moves towards personalised medicine and growing middle classes in emerging markets provide the potential for endless demand. 

Meanwhile, the move away from the "white pills and Western markets" model, a phrase which Glaxo coined some years ago, is translating into a more specialised business. 

In particular, the strong growth being witnessed in the vaccine business (which now accounts for 24% of turnover, largely due to the success of shingles drug Shingrix) has brought it level with the Consumer Healthcare business (also at 24%). This lessens the group's previous reliance on the Pharmaceuticals division, where patent expiries and the lack of new blockbuster drugs have been a perennial concern.

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Equally, a focus on cost control and the abandonment of certain R&D projects which fail the group's hurdles have led to a largely positive set of metrics, notably margins and earnings per share and a tweaking of full-year results towards the top end of the previously announced range. 

The US market, which accounts for 42% of group turnover, also saw a healthy 11% increase in sales for the period. Underlying the investment case is a dividend yield of 4.9%, a clear attraction for income seekers.

The voyage is not all plain sailing, however. The advent of generic drugs continues to be of concern and the income will either need to be replaced or drawn from other parts of the business. The scope of Glaxo's largest income generators probably needs to be broadened in order to provide some defence in leaner times. 

R&D spend should remain in laser focus, while the hike in net debt resulting from the acquisition of the Novartis stake will remain something of a drag on financial flexibility in the medium term.

Even so, the update has provided some proof that Glaxo is fast becoming a more streamlined and specialised business for whom the potential spoils are enormous. 

The share price has shared some of this optimism, having risen 12% over the last year as compared to a 4.6% decline in the wider FTSE 100, and the market consensus of the shares as a 'cautious buy' could well become subject to further upgrades.

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