GlaxoSmithKline plc (GSK) Ordinary 25p
HL comment (29 July 2020)
GlaxoSmithKline (GSK)'s second quarter revenues fell 3% year-on-year to £7.6bn. That reflects disruption caused by coronavirus - particularly in the vaccine business - partially offset by the acquisition of Pfizer's consumer healthcare business in July last year. Without this tailwind sales would've fallen 10%.
Underlying earnings per share fell 38% to 19.2p and the group announced a dividend of 19p for the quarter.
The shares fell 1.5% immediately following the announcement.
Pharmaceutical companies are generally considered defensive investments. The medicines and vaccines they provide are essential and so sales weather wider economic downturns relatively well.
However, this crisis has proven a little different. Lockdowns and a focus on addressing immediate coronavirus needs have kept patients away from doctors surgeries. That's had repercussions for GSK's vaccines business in particular.
We hope vaccines have been delayed rather than cancelled, in which case those revenues should eventually appear. But there's been disruption to other divisions too and the underlying performance there is unclear.
That's unfortunate because GSK is in the middle of a major shake-up. Some clear indications of the direction of travel would have been welcome.
The Consumer Healthcare division has been bulked out by the Pfizer merger. Meanwhile a more focused approach to R&D has seen a fortune poured into the oncology portfolio - including the $5.1bn acquisition of TESARO and a tie up with Merck that could set GSK back EUR3.7bn.
GSK's portfolio is stronger as a result, even if the business is carrying considerably more debt. However, CEO Emma Walmsley's reshuffle doesn't end there. Within three years of the joint venture with Pfizer being established, the new consumer healthcare giant will be going its own way as an independently listed company.
In general, we think all the moves make sense. Two businesses with a sharper focus should be more efficient than one conglomerate. But it also means investors are buying into what will one day be two radically different businesses.
The consumer division should be a 'steady eddie' with hopefully more predictable returns. As one of the world's largest over-the-counter medicines businesses, it should be able to deliver sizable cost savings, boosting margins. However, we've been a little disappointed about performance - with anaemic growth reliant on a few strong brands (particularly Sensodyne). We expect the new company to get saddled with a disproportionally large share of the group's debt when it goes its own way and that could hamper shareholder returns.
For the pharma group, losing the steady cash flows of the consumer business means there's more pressure on the labs. When drugs lose patent protection sales can quickly collapse. That's already a problem for GSK, so it's vital its research teams deliver the next generation of blockbusters.
So far things look promising - with the group managing to negotiate the ongoing decline in sales of blockbuster asthma treatment Advair . HIV, Oncology and Vaccines are all delivering new drugs and the pipeline has got plenty of other opportunities too.
Multi-million pound investments in Covid-19 vaccine research will inevitably attract attention.
GSK hasn't got a vaccine of its own, but its technology is finding its way into several other vaccine candidates- although these are very early stage trials. Even the most promising drugs can fall at the final hurdle. However, given the increased focus on vaccine preparedness we see the vaccines business as something of a long term jewel.
While we see some real bright spots in GSK, there's a lot of murky corners too. A 5% prospective dividend yield will inevitably attract some investors, but we find it difficult to get excited about the longer term at the moment. If the consumer healthcare business can show genuine progress that might yet change.
GSK key facts
- Price/Earnings ratio: 13.5
- 10 year average Price/Earnings ratio: 13.6
- Prospective yield: 5%
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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.
Half Year Results (Constant Exchange Rates)
Pharmaceutical sales fell 5% in the quarter, to £4.1bn.
That was driven by a 17% decline in the established pharmaceuticals portfolio, with increasing generic competition to asthma treatments Ventolin in the US and Seretide in Europe, as well as destocking of other products in Europe. HIV sales also declined 3%, as customers ran down stocks built in the first quarter.
GSK's portfolio of new Respiratory treatments saw sales rise 16%, with the smaller Immuno-inflammation and Oncology portfolios also delivering good growth.
Vaccine sales fell 29% year-on-year to £1.1bn, as coronavirus stopped patients attending surgeries. The group saw sales tumble across the portfolio.
Consumer Healthcare sales grew 25% year-on-year, driven by the Pfizer acquisition. Without that tailwind sales fell 6%. Underlying sales in Pain Relief, Respiratory Health, Oral Health and Digestive Heath all declined - partially offset by modest growth in Vitamins, Minerals and Supplements.
GSK also reported a £1.6bn of "other operating income" relating to the sale of Horlicks and other consumer brands to Hindustan Unilever during the quarter.
Higher operating costs and research & development spend meant underlying operating margins were significantly lower year-on-year.
Free cash flow in the quarter hit £1.9bn (2019: £370m) as the group collected cash relating to stockpiling sales made in the previous quarter. Together with the cash from the disposal of Horlicks that meant GSK ended the half with net debt of £23.4bn, compared to £25.2bn at the start of the year.
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