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GSK - full year guidance upped after strong Q3

GSK's third quarter revenue rose 10% to $13.2bn, ignoring the effect of exchange rates.

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GSK's third quarter revenue rose by 10% to $13.2bn, ignoring the effect of exchange rates. Strong growth in vaccine sales more than offset a fall in revenue related to COVID products.

Underlying operating profit was £2.8bn, growth of 15% despite a negative impact of seven percentage points from lower COVID sales.

The strong operating performance helped drive an increase in free cash flow, which more than doubled to £1.7bn. At the period end net debt stood at £17.6bn.

A dividend of 14p per share was declared, with a total of 56.5p still expected for the full year.

For sales and underlying profit, GSK has upped full year guidance to respective ranges of 12-13% (from 8-10%) and 13-15% (from 14-17%).

The shares were up 1.7% following the announcement.

View the latest GlaxoSmithKline share price and how to deal

Our view

GSK's feeling the impact of falling sales in COVID-19 medicines, but compared to some, the boost from the pandemic has been limited. Now that sales of COVID medicines are no longer material, comparatives should become less demanding. Meanwhile sales of other products are doing well, prompting two upgrades to full year guidance so far in 2023.

In Vaccines, further growth is expected for Shingrix for the prevention of shingles as it targets higher patient acceptance and new markets. The recently approved respiratory syncytial virus (RSV) vaccine, Arexvy, has made a good start following commercial launch and there's more to go for, but it faces some tough competition.

Strength in Specialty Medicines, which are for hard-to-treat conditions and therefore command a premium, should be another long-term growth driver. The group aims to grow its portfolio with new treatments rather than tweaking their usage, as it has done in the past. With the demerger of the consumer health division now complete GSK is now a pure play on scientifically complex therapeutics meaning that barriers to entry are very high. So far GSK is making good on the majority of its expected 2023 pipeline delivery milestones.

Cancer treatment is one key area for focus, with several late-stage treatments in the pipeline. The performance of some existing products have been suffering following legal disputes and regulatory pressure, but that's being more than offset by new approvals and product launches.

The group also has a strong presence in HIV treatments which make up about 20% of total revenues. Its newer HIV treatments are a key part of GSK's future, as generic competitors eat away at pricing power for some of the group's legacy treatments. Over the first nine months of 2023, it was encouraging to see a growing contribution from the Group's "Innovation" therapies, with two drug and long-acting regimens which now make up 53% of total HIV sales. Looking ahead the preventative treatment Apretude could fuel further growth. It's already authorised in some territories and importantly the EU has been recently added to that list.

Net debt currently sits at about 1.8x forecast cash profits. That's a level that we feel comfortable with, and a position that looks set to improve given the strong levels of cash generation and recent £0.9bn disposal of Haleon shares. The remaining stake in Haleon is worth over £2bn.

The solid financial position supports a prospective dividend yield of 4.1%. But whilst forecasted pay outs are more than twice covered by forecasted free cash flow, no dividends can ever be guaranteed.

GSK's valuation is below the long-term average, and significantly less demanding than many of its peers. This may be in part due to remaining question marks over cancer links to heartburn drug Zantac. Management is working hard to draw a line in the sand, but whilst significant court hearings are still pending, this remains a risk to be mindful of.

There's also still work to do for GSK to win investors' favour on other fronts. Strong execution of the growth strategy and clinical pipeline are likely to be the key focus for shareholders. So far so good, but remember the drug approval process is long and expensive, with many treatments never seeing the light of day.

Environmental, social and governance (ESG) risk

Product governance is a primary driver of ESG risk for this sector, with safety and marketing of medicines the key focus. Access to medicines and their affordability, as well as business ethics concerning intellectual property rights, ethical clinical research and price collusion are other topical issues. Labour relations and Bribery and Corruption are also material ESG risks.

According to Sustainalytics, GSK's overall management of material ESG issues is strong. There's an independent, board-level, corporate responsibility committee focused on ESG performance and framework and 10% of executive pay is tied to ESG metrics. It's ranked first on both the Access to Medicine Index and Access to Vaccines Index thanks to industry-leading efforts to ensure medicines and vaccines are provided to patients in need. Management practices concerning the transparency of clinical trials are strong, and it's committed to international standards. But despite a strong product safety programme, GSK lacks external quality management certification at its manufacturing sites.

ESG data sourced from Sustainalytics.

GSK key facts

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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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 disclosure for more information.

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Written by
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 1st November 2023