Dear Mr. Berko: My husband has been diagnosed with COPD, and I can’t imagine a more frightening medical disorder. He tells me that it feels as if there were an elephant sitting on his chest. His physician prescribed Advair, which has been a blessing and works like a miracle. We were so impressed that we also bought 200 shares of GlaxoSmithKline, which makes this inhaler. We paid $54 for each share in the summer of 2014. The stock seemed to fall in value right after we bought it, and it fell all the way to $37. Though the drug works very well for my husband, the stock has been very disappointing. Our stockbroker recommended that we sell the stock and use the proceeds to purchase Pfizer, which he says has better short- and long-term potential than GlaxoSmithKline. We would appreciate your comments.
— PA, Buffalo, N.Y.
Dear PA: Though I think your broker’s Pfizer recommendation has uncommon merit, I think his recommendation to sell GlaxoSmithKline and use the proceeds to purchase Pfizer is a blatant commission ploy. I like his Pfizer recommendation but strongly condemn his “sell” recommendation on GlaxoSmithKline.
Having chronic obstructive pulmonary disease, or COPD, certainly isn’t a bowl of cherries. But actually, one of the reasons the earnings and stock performance of GlaxoSmithKline (GSK-$42) have been rather stinky recently is GSK’s Advair. Advair, previously an $8 billion-revenue blockbuster drug for the treatment of COPD and asthma, lost its patent in 2016. Advair revenues plunged to $4.4 billion, causing GSK to trade at $37, its lowest price since 2009. Although Advair is still GSK’s top-performing drug (16 percent of 2016 revenues), the consensus suggests that sales will continue to decline this year and in 2018.
Through a multimillion-dollar advertising fund, the good news is that GSK’s next-generation long-lasting asthma and COPD therapies, Breo and Anoro, topped $1 billion in revenues in 2016. The uptake, though, of Breo and Anoro has lagged for two reasons: 1. Insurance coverage of these more expensive drugs has been slow to respond. 2. It’s usually difficult to persuade physicians to switch to new products. But GSK’s management expects these two drugs to bring in $1.7 billion in 2017. Importantly, the loss in revenue from the introduction of generic competition for Advair has been dwarfed by Breo and Anoro and GSK’s well-received HIV drugs, Tivicay and Triumeq, which together should generate $3.4 billion in revenues this year. It appears that management has absorbed the brunt of the generic advance on Advair, and resultantly GSK seems to be a splendid capital gains recommendation, with a $60 price target by 2018.
