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GlaxoSmithKline - de-stocking and pandemic focus hits sales

Nicholas Hyett, Equity Analyst | 28 April 2021 | A A A
GlaxoSmithKline - de-stocking and pandemic focus hits sales

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GlaxoSmithKline (GSK) reported first quarter turnover of £7.4bn, down 15% at constant exchange rates. That reflects declines across all three divisions, as consumers and healthcare groups ran down stockpiles built up earlier in the year and vaccine sales slid as governments prioritised Covid vaccinations.

Despite a decline in year-on-year operating costs, underlying operating profit fell 23% to £1.9bn.

The group announced a quarterly dividend of 19p per share, and continues to expect to hit the full year target of 80p per share.

GSK shares were broadly unmoved following the announcement.

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Our view

GSK's struggling against some formidable headwinds - and, honestly, first quarter results are not showing much of an improvement.

You might have thought a global healthcare crisis would be good for pharma groups. However, GSK's own vaccine candidates are still in trial phases, and as a result the effect of the pandemic has been all negative. Non-coronavirus vaccines - a key money spinner for GSK - have been delayed and demand for other pharmaceutical products has been hit as lockdowns kept patients away from doctors' surgeries.

Meanwhile the group is dealing with the fallout of patents on certain key drugs coming to an end. That's an inevitable part of being in pharmaceuticals - but the collapse in Advair and Ventolin sales is offsetting much of the progress in newer drugs. That headwind has further to run.

It doesn't help that the Consumer Healthcare business is showing some very mixed results - with good numbers for vitamins and minerals (largely acquired from Pfizer) offset by lacklustre performances elsewhere.

It's not a perfect backdrop for the transformational plans CEO Emma Walmsley has for the group. By 2022 it will have split into two companies, one taking the BioPharama assets and the other the Consumer Healthcare brands. In general though, the move makes sense. Two businesses with a sharper focus should be more efficient than one conglomerate, and it will help reduce the confusion around exactly what GSK is offering investors. But it also means investors are buying into what will one day be two radically different businesses.

The consumer division should be a 'steady eddie' with hopefully more predictable returns. As one of the world's largest over-the-counter medicines businesses, it should be able to achieve significant efficiencies, ultimately giving the group attractive margins.

However, performance from these brands leaves something to be desired. We also expect the new company to get saddled with a disproportionally large share of the group's debt when it goes its own way, and that could hamper shareholder returns.

For the pharma group, losing the steady cash flows of the consumer business means there's more pressure on the labs to come up with new drugs before old ones fall off. Increased focus on vaccine preparedness going forwards will help, since vaccines tend to offer longer term sources of revenue. But it's vital its research teams deliver the next generation of blockbusters.

The pipeline has delivered some reasonable results thus far - although it's been unable to offset the loss of legacy sales more recently. HIV, Oncology and Vaccines are all delivering new drugs with 59 medicines and vaccines in development. But the problem any pure-play pharmaceuticals business faces is that even the most promising drugs can fall at the final hurdle.

It's also worth noting that management expect the separate businesses to pay a lower dividend overall than GSK has been able to support to date. The size of that cut is as yet unclear.

While we see some real bright spots in GSK, there's a lot of murky corners too. A 5.6% prospective dividend yield will inevitably attract some investors, but remember that's only temporary and not guaranteed. In its present form GSK struggles to present a clear picture of what it offers investors -hopefully its successor companies are a little more streamlined.

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GSK key facts

  • Price/Earnings ratio: 12.9
  • Ten year average Price/Earnings ratio: 13.7
  • Prospective dividend yield (next 12 months): 5.6%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

First Quarter Results (constant exchange rates)

The Pharmaceuticals division saw sales fall 8% to £3.9bn. That reflects declines in the HIV and established pharmaceutical portfolios, which more than offset growth in newer drugs. The group blamed the run-down of pandemic related stock build for 4 percentage points of the decline. Ongoing generic competition for mature asthma treatments Ventolin and Advair/Seretide accounted for much of the rest, along with reduced anti-biotic demand. Operating profits came in at £1.1bn, up 2% year-on-year thanks to lower costs.

Vaccines saw sales fall 30% to £1.2bn, with a particularly stark decline in the US. That reflects increased focus on Covid vaccines, which hit shingles vaccine Shingrix particularly hard. Operating profits in the division came in at £306m, down 60% year-on-year.

The Consumer business saw sales fall 16% to £2.3bn. The Respiratory Health business saw sales fall 42%, as social distancing imposed as part of the pandemic resulted in a mild cold and flu season, but none of the group's product areas were able to deliver growth. The divisions also struggled against tough comparisons after extensive stocking in the same period last year. Operating profits were £535m, down 25% year-on-year.

GSK reported a free cash outflow of £3m in the quarter, down from a £531m inflow a year ago. Net debt rose from £20.8bn at the start of the year to £21.4bn.

The separation of the Pharmaceutical and Healthcare businesses is on course for 2022, and full year earnings projections remain unchanged.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.