UBS upgrades GlaxoSmithKline to 'buy', says earnings concerns are overdone

The bank said that things are likely to get worse before they get better, with 2018 showing a decline and no growth in 2019. "Over this time horizon opex increases, Advair generic erosion and increasing competition in HIV (ViiV) coincide," it said.

However, UBS pointed out that the company should emerge from its earnings plateau after that, adding that in the meantime, investors should be rewarded with a high dividend yield.

The bank said that uncertainty around the trajectory of the ViiV HIV business does justify a discount to the sector, but this is now priced into the valuation.

"Against market belief the dividend looks secure in our view and investors should be rewarded with two years of 80p before there is an opportunity to decide whether there is ‘gold at the end of the rainbow’ (2019E 3-year PEG of 2.2x versus sector average of 2.6x)."

UBS estimates that ViiV accounts for around a third of group earnings before interest and tax.

"Gilead re-enters the HIV integrase inhibitor market in 2018 taking new patient share from GSK's Tivicay/Triumeq franchise. Given GSK's EBIT dependency on ViiV, this uncertainty requires a discount to the sector in 2019 on realistic earnings base. At 13x we believe that is now priced in - a good starting point when looking at GSK as a bond proxy."

At 1420 GMT, the shares were up 1.9% to 1,322.50p.