Today GlaxoSmithKline completed the demerger of Haleon, its consumer healthcare business. Existing GlaxoSmithKline shares have been divided into one GSK share and one Haleon share. Haleon is now trading on the London Stock Exchange under the ticker HLN.
After the market closes today, GSK will consolidate its remaining shares and offer a further update. The ratio will depend on GSK price fluctuations throughout the day, as the group aims to restore GSK's share price to pre-demerger levels.
Shares were down 19.2% following the announcement.
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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 has underpinned a strong performance as the group separates itself from its consumer healthcare arm.
New GSK is what's left behind and houses 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 has been passed on to the new consumer business, Haleon. 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.
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 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.
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