GlaxoSmithKline plc (GSK) Ordinary 25p
HL comment (28 October 2020)
GlaxoSmithKline (GSK) reported third quarter sales of £8.6bn, down 5% on an underlying basis. However, operating profits of £1.9bn were up 2% (underlying) - reflecting significant declines in operating and research & development expenses.
Free cash flow was negative in the quarter, at -£180m, compared to a £1.9bn inflow last year.
The group declared a quarterly dividend of 19p per share - flat year-on-year.
The shares were broadly unmoved 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 - even if cost cuts have helped keep profits on course for the full year.
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 by 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.
The pipeline has delivered some reasonable results thus far - although it's been unable to offset the loss of legacy sales more recently. HIV, Oncology and Vaccines are all delivering new drugs with a total of 40 drugs and 18 vaccines in development.
Multi-million pound investments in Covid-19 vaccine research will also inevitably attract attention. Its vaccine technology is finding its way into several other vaccine candidates- although these are still early stage trials.
The problem any pure-play pharmaceuticals business faces is that 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 jewel long term.
While we see some real bright spots in GSK, there's a lot of murky corners too. A 5.9% prospective dividend yield will inevitably attract some investors, but we find it difficult to get excited about the longer term at the moment. Having said that, if the consumer healthcare business can show genuine progress that might yet change.
GSK key facts
- Price/Earnings ratio: 11.6
- 10 year average Price/Earnings ratio: 13.6
- Prospective dividend yield (next 12 months): 5.9%
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.
Third Quarter Update (Constant Exchange Rates)
Pharmaceutical sales fell 3% in the quarter to £4.2bn. That was driven entirely by a decline in 'established pharmaceuticals' which includes GSK's more mature and often off patent treatments. Asthma treatments Ventolin and Advair/Seretide were hit by increased competition from generics while the pandemic also caused lower demand for antibiotics. Sales of GSK's newer drugs rose 12%, with particularly strong results from new Respiratory treatments where sales rose 26%.
GSK's Vaccines business saw sales fall 9% to £2.0bn, with declines in Shingles (down 25%) and Established Vaccines (down 15%). The declines were driven by coronavirus disruption, as visits to medical practitioners declined and some vaccine points closed. However influenza vaccines benefited from a bump, up 21% to £445m, as demand strengthened both in the US and Internationally.
Consumer Healthcare sales came in at £2.4bn in the quarter, up 2% year-on-year. However, the division benefitted substantially from the acquisition of Pfizer's consumer healthcare business last year. Excluding this effect sales would have fallen 6%. Growth in Oral Health and Vitamins was offset by weaker results in Respiratory and Pain Relief - as cold and flu treatments saw lower retail sales and Advil performed poorly in the US.
The group has received three regulatory approvals in the quarter, including US regulatory approval for Trelegy as an asthma treatment and Multiple Myeloma and Hypereosinophilic Syndrome treatments. The group has also progressed several HIV treatments and vaccines.
The Sanofi-GSK COVID-19 vaccine candidate is currently in Phase II and is expected to begin Phase III in December.
The group finished the quarter with net debt of £23.9bn, down from £25.2bn at the start of the year. That was driven by over £3bn of proceeds from disposals during the year.
The group continues to expect underlying earnings per share to some in at the lower end of the -1% and -4% growth forecast for the year.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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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