GlaxoSmithKline (GSK) recently announced it has hiked its stake in Response Genetics Inc. (RGDX), a company focused on the development and sale of molecular diagnostic testing services for cancer, to 15.2%. Glaxo made an investment of $5.5 million and purchased 5 million newly issued shares of Response Genetics at $1.10 per share.

Response Genetics and Glaxo have a long standing relationship focused on Glaxos immunotherapy and oncology candidates, wherein Response Genetics conducts companion diagnostic tests and other related activities for Glaxos candidates.

We currently have an Underperform recommendation on Glaxo. The stock carries a Zacks #3 Rank (Hold rating) in the short run.

Several products in Glaxos portfolio including Valtrex, Arixtra, Evoclin, Lamictal, Imitrex, Requip, Combivir and Epivir are facing declining sales due to intense generic competition. We expect the company's top line and gross margins to remain under pressure in the coming quarters. The EU pricing pressure will continue to affect sales.

Glaxos second quarter 2012 earnings of 79 cents per American Depository Share (ADS) was well below the Zacks Consensus Estimate of 84 cents. Earnings fell 2.5% year over year. Revenues also decreased 7.3% year over year to $10.2 billion and came in below the Zacks Consensus Estimate of $10.4 billion. The company lowered its revenue guidance and expects revenues to remain flat year over year (at CER). We note that earlier Glaxo was expecting revenues to grow from 2011 levels.

Glaxo is looking towards deals and acquisitions to drive growth. The company is focusing on increasing the rights on its partnered products and promising pipeline candidates, so that it stands to benefit more from their success.

Glaxos acquisition of Cellzome and Human Genome Sciences and increasing investment in Theravance Inc. (THRX) and Amicus Therapeutics (FOLD) indicate its efforts to expand the pipeline.

Apart from this, Glaxo continues to make progress with its cost-cutting initiative, which should help reduce the impact of increasing generic competition over the next few years and help earnings grow.

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Glaxo Increases Stake in RGDX

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