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GSK - profits stable despite fall in COVID-19 sales

GSK's first quarter revenues fell by 8% to ?6.9bn ignoring currency movements.

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GSK's first quarter revenues fell by 8% to £6.9bn ignoring currency movements. This reflected lower sales of COVID-19 medicines. Excluding COVID-19 sales, turnover was up 10% with growth across all segments.

Despite the drop in the top line, underlying operating profit was broadly flat at £2.1bn even after the impact of legal charges relating to the Zejula dispute.

Free cash outflow was £689m against an inflow of £1.5bn last year, in part due to a favourable legal settlement in the comparative period but also an increase in inventory.

Net debt totalled £18.0bn up by £0.8bn from the end of 2022.

Full year guidance remains unchanged.

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

The shares were flat 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 the likes of Pfizer and Moderna the boost from the pandemic has been limited, and therefore so is the potential downside. Meanwhile sales of its other products have got off to a healthy start in 2023. We think the 6-8% guidance range for growth of non-COVID-19 sales is a reachable target.

Strength in Specialty Medicines, which are for hard-to-treat conditions and therefore command a premium, underpin this goal. 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.

But the drug approval process is long and expensive, with many treatments never seeing the light of day.

Cancer treatment is one key area for focus, with several late-stage treatments in the pipeline. But following a recent court battle with Astrazeneca, GSK will need to share some of the spoils from its biggest selling cancer drug Zejula with its rival. The financial impact is yet to be determined and whilst an appeal is under consideration there's no guarantees of success. Expensive legal fees are already racking up.

The group also has a strong presence in HIV treatments which make up nearly 20% of total revenues. Its newer HIV treatments are key part of GSK's future, as generic competitors eat away at pricing power for some of the group's legacy treatments. Over 2022, it was particularly encouraging to see 67% growth in its next generation products. So far that momentum has carried over into 2023.

In Vaccines, further growth is expected for Shingrix as it launches into new territories. The respiratory syncytial virus (RSV) vaccine is certainly one to watch, but there is growing competition to be first to market.

Despite a first quarter wobble, we're encouraged by GSK's improving debt position, and analyst forecasts suggest it'll be just 1.4x cash profits by the year end - a level that we feel comfortable with. Forecasted dividend pay outs are nearly twice covered by free cash flow according to consensus estimates. However, no dividends can ever be guaranteed.

GSK's valuation is below the long-term average, and significantly less demanding than many of its peers. We think a low double-digit earnings multiple coupled with nearly a 4% yield, make this an interesting time to consider adding the shares as part of a diverse portfolio.

To further close the rating gap will require strong execution of GSK's growth strategy and clinical pipeline. New drug approvals are never a given, and even established therapies can fall foul of the regulators, or be unseated by new entrants.

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

ESG data sourced from Sustainalytics

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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: 26th April 2023