GlaxoSmithKline (GSK) recently announced that it will invest more than ?500 million on manufacturing units in the UK. Glaxo aims to increase the production of key materials for its pharmaceutical and vaccines segment. The initiatives are expected to create approximately 1,000 new jobs.
Glaxo’s investment decision follows the UK government’s budgetary announcement regarding the implementation of a patent box. A patent box enables companies to enjoy a lower tax rate on income generated from intellectual property owned in the UK, thus encouraging investment in research and development in the country.
Glaxo will develop a ?350 million manufacturing facility in Ulverston, Cumbria, marking the first new unit to be built by Glaxo in the UK in the last 40 years. Construction is expected to begin in 2014 – 2015 and the unit is likely to be ready and fully functional 6 years from the commencement of construction. In the long term, based on the attractiveness of the UK’s investment environment, Glaxo would consider a further ?350 million investment in the Ulverston unit.
In addition, Glaxo plans to invest more than ?100 million in its two manufacturing sites in Scotland – Montrose and Irvine, and ?80 million in its sites at Ware in Hertfordshire and Barnard Castle in County Durham.
Our Recommendation
We currently have a Neutral recommendation on Glaxo. The stock carries a Zacks #3 Rank (Hold rating) in the short run.
While several products in the Pharmaceuticals segment are facing generic competition, the Consumer side of the business is performing well and should help drive top-line growth. Moreover, Glaxo’s diversified base and presence in different geographical areas should help support revenue growth.
Meanwhile, Glaxo’s restructuring initiative should help offset the impact of increasing generic competition in the next few years and help increase earnings at a faster pace than revenues. Share buybacks should also drive bottom-line growth.
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