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GSK - strong growth and margin expansion

GSK's 2022 results revealed that sales grew 13% to 29.3bn pounds, excluding the effects of currency movements.

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GSK's 2022 results revealed that sales grew 13% to £29.3bn, excluding the effects of currency movements. The growth was driven by strong performances in speciality medicines which were up 29%, and also vaccines which saw revenue grow by 11%.

Underlying operating profit was up 14% to £8.2bn, at a margin of 27.8%, which was 0.3 percentage points ahead of last year. The negative margin impact of lower margin COVID-19 sales was more than offset by several factors including the strong top line performance, a change in products mix, and higher royalty income.

Free cash flow from continuing operations, which does not include a contribution from the demerged consumer healthcare division Haleon, was broadly flat at £3.3bn. Year end net debt came in at £17.2bn down from £19.8bn.

GSK declared a fourth quarter dividend of 13.75p.

Looking ahead sales are expected to increase by 6% to 8% in 2023. Underlying operating profit is expected to grow between 10% to 12%. Guidance for total 2023 dividends of 56.5p remains unchanged.

The shares were broadly unmoved in early trading.

View the latest GlaxoSmithKline share price and how to deal

Our View

We were impressed by GSK's first full-year results since the demerger of its Consumer Health division, Haleon. 2023 guidance suggests performance is comfortably within its medium-term targets of 5 to 10% annual growth in sales and underlying operating profits.

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

Cancer treatment is one key area for growth, with several late-stage treatments in the pipeline. One example is momelotinib via the Sierra Oncology acquisition, with an authorisation decision by the US FDA due in June 2023. But the recent withdrawal of Blenrep in the US is likely to leave a gap to fill, as this previously accounted for around 20% of all oncology sales in 2022.

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.

Vaccines are another important growth driver. The Shingrix vaccine for Shingles achieved sales of £3bn in 2022, and further growth is expected 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. GSK believes its vaccine could eventually add $4bn annually to revenues.

We're encouraged by GSK's improving debt position, and analyst forecasts suggest it'll be just 1.3x cash profits by the year end - a level that we feel comfortable with. Forecasted dividend pay outs are about two times covered by free cash flow according to consensus estimates. However, no dividends can ever be guaranteed.

Compared to forecast earnings, the valuation is below the long-term average, and significantly below many of its peers. With the shadow Zantac litigation diminishing, a single digit earnings multiple coupled with 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.

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 February 2023