Last updated: February 5, 2014 7:03 pm

Cash and strong pipeline give GSK a shot in the arm

Cash and a strong pipeline help pharma group recover from China tumble

“Medicine can only cure curable disease, and then not always,” so the Chinese proverb goes. Fortunately for GlaxoSmithKline, the pharma group’s woes in China as a result of the investigation into bribery allegations seem to be responding to treatment.

Sales down 61 per cent in the third quarter of 2013, were off a mere 29 per cent in the last three months of the year. And while the negative impact is set to continue through the first half of 2014, by the second half those difficult figures will have become the softest of comparatives, and the picture will look more positive.

But even when cured, GSK in China will have lost significant ground that others are keen to occupy. It does not work for the group to downplay the impact by pointing out that China accounts for only 2 per cent of revenues: back in July it was twice that. Meanwhile, AstraZeneca – which reports full-year results on Thursday – sounded disappointed in its third-quarter Chinese growth of 13 per cent.

The test tube half-full case for GSK has various strands. One is its formidable cash generation – £4.8bn in adjusted free cash flow last year to help support share buybacks and dividend growth. Another is its proven and predicted ability to raise earnings more than sales.

The pipeline suggests good news too: five new drugs were approved in 2013 while 40 are in late – or late-ish – stage development. And as a sign that all this activity is well-directed, the internal rate of return on R&D spending has reached 13 per cent – up one percentage point in each of the past two years.

Despite a small uptick in the GSK share price after the results, it has still improved only 10 per cent in the past 12 months, while AZ has risen about 25 per cent. As GSK recovers from its fall into the ditch, the group’s investors must hope that, in accordance with the ancient Chinese saying, the tumble has made it wiser.

Digital dominates DMGT

An update from Daily Mail and General Trust shows something peculiar has happened to Harry Hardnose, the traditional newspaper hack, writes Jonathan Guthrie. He’s gone all digi. He’s pulled a hoodie over his crumpled suit and does yoga at lunchtime instead of downing triples in El Vino’s.

Growth in advertising revenue from the MailOnline website is now more than compensating for declining ad income from the Daily Mail. The difference between the two figures in the first quarter was £4m.

Meanwhile, DMGT, capitalised at £3.3bn but kept out of the FTSE 100 by its dual share structure, has confirmed that Zoopla could be sold or floated. DMGT owns more than half of the property website, reportedly valued at £1.3bn.

But the real reinvention of the Harmsworth family business has been as a trade publisher and events organiser. Digital growth has given glamour to the shares, up 60 per cent over 12 months and ahead of their peers on a forward earning multiple of 18.2 times.

Even so, finance director Stephen Daintith focused on a different message: observing that half the eyeballs scanning the celeb-driven MailOnline are American, but only 10 per cent of online ad revenue comes from the US.

Pundits who predicted the destruction of newspapers by citizen bloggers should eat their beanies. Perhaps even a venerable financial daily could morph into a digital start-up – though perhaps without a “sidebar of shame” exposing the excess poundage of top bankers. The transformation of Harry Hardnose into Henry Hyperlink shows anything is possible.

Premium pricing

In this high season for IPOs, it may seem as though any company should find it a breeze to attract investors.

Brit Insurance, which has just appointed bankers to advise about a possible return to the public market, looks like the group to test this theory.

The main IPO issue for the Lloyd’s of London underwriter is that it is also being touted around possible trade buyers when forces of consolidation are at work. Downwards pressures on premiums and distribution deals such as the one between Aon Benfield and Berkshire Hathaway are tilting the sector towards size.

If those within the industry with scope for synergies do not want to buy Brit, institutional investors may ask, what is the point of investing in it on its own?

As so often, the answer is price. In deals recently announced, insurers have changed hands at about 1.5 times book value – as with Sompo’s December acquisition of Canopius. In an IPO, Brit should look for a more modest multiple.


DMGT: jonathan.guthrie@ft.com

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