At the time of its creation during 2000,GlaxoSmithKline(LSE: GSK) was the worlds largest pharmaceutical company with a bright future. However, 15 years later and the group has slipped down the rankings and is now the worlds seventh largest pharma company.
Whats more, Glaxos shares have underperformed those ofitsof its larger peers, and international stock indexes by around 50% over the past 15 years, excluding dividends. The worlds largest pharma ETF,PowerShares Dynamic Pharmaceuticals, has outperformed Glaxo by a shocking 400% since 2005.
But are these dire returns a reason to dump Glaxo? Or does the company have atrickup its sleeve that could re-ignite growth?
Restructuring
Glaxos boss,Sir Andrew Witty, who came to power during 2008, has changed Glaxos direction over the past six years. Indeed, the company is now focused on the non-drug, vaccines and consumer healthcare side of the industry.
At the same time, Sir Witty has pushed the company to withdraw fromthe morecomplex areas of drug discovery, including the red-hot market of immuno-oncology anti-cancer therapies.
Management has decided to take this route for one simple reason; Glaxo finds theeconomics of healthcare challenging.
Challenging economics
Developing new drugs for sales isnt cheap. And even after spending billions developing treatments, only around 7% of new drugs are approved for sale.
So, the drugs thatdomanage to make it through the gauntlet of fire have to be home-runs.
Unfortunately, this is not always the case. Moreover, as populations around the world age, healthcare budgets are comingunder pressureand consumers are increasingly seeking out cheaper alternatives to expensive treatments.
As a result, the returns generated from the research, development, production and sale of treatments are falling. Glaxos management believes that it wont be long before the economics of drug discovery unravel.
Its this belief that has pushed Glaxo to keep its distance from the drug development side of the business.
The risk of poor returns has also kept Glaxo from doing any big deals recently. While the companys larger peers have been spending billions tobuy-upsmaller innovative rivals, Glaxo has waited on the side-lines.
Faster growth
All in all, Glaxos management believes thatselling vaccines and consumer products into global healthcare markets, will offer fastergrowth,with a better a return, than the overcrowded complex drugs market.
However, only time will tell if Glaxohas made the rightdecisionor a costly mistake.
That said, theres not really much that can go wrong for Glaxo. The companys growth may stagnate ifmanagementsprediction turns out to be wrong. However, sales ofvaccines and consumer products are unlikely to evaporate, making Glaxo a low-risk, highly defensive investment.
Income play
With a steady stream of income from the sales of vaccines and consumer products, Glaxos management has been able to guaranteethe companys dividend payout at its current level of 80p per share of the next three years.
This means that even ifGlaxofails to grow over the next three years, investors are set to receive dividends totalling 240p per share in income over the period. A total yield of 16.6% based on current prices.
Glaxos dividend payout is currently covered 1.2 times by earnings per share.
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Rupert Hargreaves owns shares of GlaxoSmithKline. The Motley Fool UK has recommended GlaxoSmithKline. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.