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GSK - strong Q2 prompts full-year upgrade

GSK saw second-quarter sales increase by 4% to £7.2bn, ignoring the effects of exchange rates...

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GSK saw second-quarter sales increase by 4% to £7.2bn, ignoring the effects of exchange rates. With COVID-19 medicines stripped out, the growth rate was 11%, with vaccines seeing the strongest uplift.

Underlying operating profit was up 11% to £2.2bn. That's a two percentage point increase in margin to 30.2%, largely reflecting the shift in sales mix away from less profitable COVID-19 products.

Free cash flow from continuing operations was up 34% to £348m. Year-to-date net debt has increased by £1bn to £18.2bn, including the impact of the £1.4bn acquisition of Bellus Health.

GSK declared a 14p dividend per share, with 56.5p in dividends expected for the year as a whole.

The Group has seen good business momentum across all product areas but particularly in HIV, as well as in General Medicines, driven by a strong allergy season. This has prompted an upgrade to full-year guidance. GSK's growth expectations now stand at 8%-10% for turnover, and 11-13% for underlying operating profit.

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 some, the boost from the pandemic has been limited . Therefore, so is the potential downside. Meanwhile sales of its other products have got off to a healthy start in 2023 prompting an upgrade to full year guidance.

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.

Cancer treatment is one key area for focus, with several late-stage treatments in the pipeline. But the performance of its existing products have been suffering following legal disputes and regulatory pressure, and sales in this category are expected to decline this year before returning to growth in 2024.

The group also has a strong presence in HIV treatments which make up over 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 half 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 51% of total HIV sales. Looking ahead the preventative treatment Cabrotegavir could fuel further growth. It's already authorised in some territories and now looks to be on track for approval in Europe.

In Vaccines, further growth is expected for Shingrix as it targets higher patient acceptance and new markets. The recently approved respiratory syncytial virus (RSV) vaccine, Arexvy, is certainly one to watch, but it faces some tough competition.

Net debt has grown over the first half but given that's down to an acquisition which brought in a late-stage pipeline candidate, we don't see it as a red flag. Analyst forecasts suggest it'll be just 1.4x cash profits by the year end - a level that we feel comfortable with. The shares are on a prospective dividend yield of 4%. But whilst forecasted dividend pay outs are nearly twice covered by free cash flow according to consensus estimates, no dividends can ever be guaranteed.

GSK's valuation is below the long-term average, and significantly less demanding than many of its peers.

Whilst things are moving in the right direction, there's still work to do for GSK to win investors favour. To further close the rating gap will require strong execution of GSK's growth strategy and clinical pipeline. But the drug approval process is long and expensive, with many treatments never seeing the light of day. 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.

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 July 2023