Is GSK a bargain?

Is GSK a bargain?

As lawyers begin trolling for Avandia patients and debate rages over the FDA’s drug approval process, shares of GlaxoSmithKline (NYSE:GSK) continue to suffer. Since the news broke on Avandia, GSK shares have dropped nearly 7% and many see more bloodletting as the Avandia situation plays out. JP Morgan, Deutsche Securities and ABN Amro have all downgraded the stock. While this reaction is not unexpected, patient investors may be wise to take the opposite view. All one has to do is look at shares of a company that is likely to benefit from GSK’s current troubles, namely Merck (NYSE:MRK).

Back on September 30, 2004 the day Merck pulled Vioxx from the market, the stock closed at $33. Today almost three years later Merck shares stand at $54.48, up over 60% since that faithful day. Looking back in time Merck faced a situation that is almost identical to what’s ahead for GSK. While it seems incomprehensible today, there were some who believed that the Vioxx situation would force Merck into bankruptcy. Others felt Merck would have no choice but to do a major deal to improve what then looked like a rather lean pipeline of new products.

Diabetic Investor sees a similar outcome for shares of GSK for long-term investors. Like Merck, over the near term GSK will struggle creating further price erosion and hence an even better buying opportunity. Just as Vioxx captured national attention and created a cottage industry for attorneys, Avandia will follow a similar path. It’s too early in the process to predict if GSK will be forced to pull Avandia from the market as Merck did with Vioxx and no one can predict the outcome of what surly will be a protracted legal battle. There is also no question sales will suffer as physicians begin moving patients to alternate therapies.

Still when it’s all said and done Diabetic Investor believes an investment in GSK is worth the risk. It will be a bumpy ride over the next few quarters but in the end GSK shares will recover and move onto new highs.

“Timid men are more likely to be moved to trepidation than daring in the face of great opportunities” – Henry Kissinger

David Kliff
Diabetic Investor
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