Welcome to HL's reimagined News, Insights and Research experience. Find out more

Share research

GSK - specialty medicines acquisition

GSK has agreed to buy Affinivax, a vaccine maker with late-stage pneumococcal vaccine candidates. The deal will cost GSK $2.1bn upfront, ...

No recommendation - No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Prices delayed by at least 15 minutes

This article is more than 1 year old

It was correct at the time of publishing. Our views and any references to tax, investment, and pension rules may have changed since then.

GSK has agreed to buy Affinivax, a vaccine maker with late-stage pneumococcal vaccine candidates. The deal will cost GSK $2.1bn upfront, with a further $1.2bn expected to be paid throughout the drug development process. The deal is expected to close in the third quarter.

The group's still expecting to deliver compound annual sales growth of 5% and operating profit growth of 10%.

Shares were broadly flat following the announcement.

See the latest GSK share price, charts and how to deal

Our view

GlaxoSmithKline's business is benefitting from our exit from the pandemic, as Shingrix vaccine sales recover and the market for antibiotics normalises. Together with COVID-solutions sales, this underpinned better than expected results as the group marches forward with its Consumer Healthcare demerger, on track to complete later this year.

New GSK is what'll be left behind and will house the Pharmaceutical and Vaccines businesses. It will retain a stake in the newly listed Consumer company, but this will eventually be sold off to help shore up the balance sheet.

A considerable quantity of GSK's sizeable debt pile will be passed on to the new consumer business. The consumer business will start life with a net debt to cash profits (EBITDA) ratio of up to 4.0, compared to the 2.0 times planned for New GSK. That makes sense - the consumer business is capital light and revenues should be relatively stable over the long term, unlike pharmaceuticals, allowing it to service a larger debt pile. Nonetheless the balance sheet set up means the Consumer business will probably start life with a pressing need to cut debt.

It's this need to clear up the balance sheet that's led to a 31% cut in the forecast dividend in 2022. And with the New GSK dividend expected to tick along at a lower level from 2023, and the Consumer business likely to be cutting debt at least initially, it could take years for the overall dividend to return to its current level. As with any dividend there are no guarantees.

There is, however, slightly better news on guidance for New GSK over the next five years. Underlying operating profit growth is expected to average around 10% a year, driven by growth in Vaccines and Speciality Medicines. The group's Affinivax acquisition should help with this, while more mature treatments are expected to be broadly stable over the period.

Management plans to exceed that target in 2022. The group's been helped by an improving backdrop and is looking to capitalise on recently approved HIV treatments, a growing pipeline of oncology drugs and a strong vaccines business.

GSK seems to be getting its ducks in a row ahead of the break up. The ambitious growth targets for the future are predicated on successful trial results, but drugs fall at the final hurdle all too often. We're pleased to see progress at GSK, and all being well shares could rerate. However, uncertainty clouding the long-term picture has kept its valuation in-line with the long-term average.

GlaxoSmithKline's 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.

First Quarter Results (27 April 2022)

First quarter sales beat expectations and rose 32% to £9.8bn ignoring the impact of exchange rates. This reflected a 40% increase in Commercial Operations, led by Xevudy sales, and a 14% rise in Consumer Healthcare sales, both of which were helped by last year's weaker performance.

Including the impact of COVID-19 solutions, which includes the group's monoclonal antibody treatment Xevudy, underlying operating profit rose 39% to £2.6bn. This was also ahead of expectations.

The group expects full year underlying revenue growth between 5% and 7% and underlying operating profit growth of 12-14%, in line with previous guidance. This excludes contributions from COVID-19 solutions, which are expected to reduce operating profit growth by between 5% and 7% as lower-margin Xevudy sales make up a greater proportion of sales.

GlaxoSmithKline announced a 14p interim dividend.

Revenue growth in Commercial Operations was strong across all geographies, with the group's largest market, the US leading the way with 57% growth. Europe and International sales were up 36% and 20% respectively.

Revenue in Specialty Medicines rose 97% to £3.1bn, primarily reflecting the impact of Xevudy sales. Excluding those, sales grew 15%.

Vaccine revenue rose 36% to £1.7bn as Shingrix sales in the US and Europe recovered after waning last year due to Covid-related disruption.

General Medicines saw revenue rise 3% to £2.3bn. Recovery in antibiotics sales and favourable returns and rebates from the prior period offset rising generic competition in the US, Europe and Japan.

Consumer Healthcare, which is due to be spun off and is not included in the headline results, saw sales rise 14% to £2.6m, reflecting strong growth across all categories. International sales made up the bulk of sales, up 17% to £1.1bn. Sales in the US also rose 17% to £857m and Europe saw sales rise 8% to £627m.

A one-off settlement with Gilead regarding HIV drugs added £924m to operating profits, though this was partly offset by an increase in finance costs.

Free cash swung from an outflow of £3m to a £1.7bn inflow, reflecting higher profits. Net debt was down slightly to £19.4bn.

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.

Latest from Share research
Weekly newsletter
Sign up for editors choice. The week's top investment stories, free in your inbox every Saturday.
Written by
Laura Hoy
Laura Hoy
ESG Analyst

Laura is part of HL's ESG analysis team, working to offer research and analysis to help with sustainable decision making. She also works with other parts of the business to help integrate ESG.

Our content review process
The aim of Hargreaves Lansdown's financial content review process is to ensure accuracy, clarity, and comprehensiveness of all published materials
Article history
Published: 31st May 2022