GlaxoSmithKlines(LSE: GSK) shares have been on fire this week, outpacing the wider FTSE 100 by more than 3% over the past five days.
This strength has beena result of renewed merger speculation, which has been surrounding the company for some time. Rumours circulated earlier in the week that Pfizer, the US pharmaceutical giant that tried and failed to buyAstraZenecalast year, is putting together a 19-per share bid for Glaxo.
Pfizer has yet to confirm or deny these rumours,although analysts have been speculating that Pfizer will make an offer for Glaxo for around a year now. So far, no bid has emerged, and its unlikely an offer will be made this time.
However, Pfizer isnt the only company thats been cited as having an interest for Glaxo. Theres also talk that Swiss pharma giantNovartis, whichbought Glaxos oncology operation for $16bn last year,could make a bid for the UK group. That said, its believed that Novartis will only make an offer if peerRochewas to agree to buy parts of Glaxo after a deal.
Nothings certain
Theres no guarantee that Pfizer orNovartiswill make an offer for Glaxo in the near future. As you come to realise, many of the markets takeoverrumours never mature, and its likely that this rumour has no weight behind it.
But there is a chance that Glaxo could be acquired by a larger peer over the long term. You see, Glaxo has the best pipeline of treatments under development within the pharmaceutical industry. Indeed, the group has 258 new products in its pipeline, 40 of which arein advanced clinical trials. Management expects at least half of these drugs will beon the market by 2020.
And as many big pharma groups are now buying up growth, rather than building it themselves, Glaxos sector-leading pipeline could be too good to pass up.
Whats more, Glaxo is one of the cheapest companies in the big pharma group.
Undervalued
Glaxos peers, including the likes ofNovartis, Pfizer, Roche and Sanofi all trade at an average forward P/E of 22.2. Glaxo trades at a forward P/E of 17.5. Whats more, based on City earnings estimates for 2016 and 2017, Glaxo is currently trading at a valuation discount of 25% to its wider peer group.
Other valuation metrics also show the same kind of discount. Using the enterprise value to earnings before interest and tax or EV/EBIT metric, Glaxo is trading at a discount of 25% to its wider peer group on both a forward and current basis. Glaxos shares are clearly a steal at present levels.
As Glaxo is trading at such a wide discount to the rest of its peers group, and the company has one of the best treatmentpipelinesin the group, it can only be a matter of time before a larger peer swoops on the company.
Also, Glaxo currently supports a dividend yield of 5.5% so investors will be paid to wait for an offer.
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Rupert Hargreaves owns shares of AstraZeneca and 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.