Shoots of Change
In July 2022, GlaxoSmithKline (GSK), a London-based global biopharma company, made a historic decision and demerged its consumer healthcare business by forming Haleon as an independent company. The Q3 2022 press release stated that after the demerger, GSK's total ownership (including ESOP trusts and SLPs) is 13.5% in Haleon. Pfizer holds a 32% stake in Haleon.
As a result of the successful demerger of its consumer healthcare segment, the company now focuses on biopharmaceuticals, prioritizing investment in the development of novel vaccines and specialty medicines. The business operations of the company are based on therapeutic areas such as infectious diseases, HIV, oncology, immunology, and respiratory diseases.
Strengthening its core
Solidifying its forte in cancer, GSK acquired 100% California-based Sierra Oncology, Inc. It is a late-stage biopharmaceutical company focused on targeted therapies for the treatment of rare forms of cancer, for $1.9 billion (£1.6 billion) as per the Q3 2022 press release. GSK also acquired Affinivax, Inc. based in Cambridge, Boston, Massachusetts which is a clinical-stage biopharmaceutical company on August 16th, 2022.
According to the Q3 2022 press release, the company’s sales increased to £7.8 billion as a result of strong commercial execution across specialty medicines, vaccines, and general medicines. With impressive data readouts and strategic business development, the company has consistently strengthened its R&D pipeline.
Biopharma focused with progressive pipeline
After the Haleon demerger in July 2022, GSK now focuses to be a biopharma company, says the company strategy. They are prioritizing innovation in vaccines and specialty medicines. This would increase the opportunities to prevent diseases and treat them.
In Q3 2022 results, Emma Walmsley, CEO, GSK said, “We are again raising our full-year guidance and expect good momentum in 2023, further strengthening our confidence in our performance outlooks, driven by Shingrix global expansion and expected new launches including our new RSV vaccine.”
GSK has 19 medicines and vaccines in phase III development (including major lifecycle innovation or under regulatory review). Further, total 65 vaccines and medicines are in the clinical development phase, which is included in the Q3 2022 Presentation. This brings about 85 vaccines and medicines (inclusive of all phases and indications), all mentioned in the Q3 2022 Earnings Report.
Apart from this, at Citi's 17th Annual BioPharma Conference Roger Connor, the company President says they are also planning to expand from 24 markets to 35 markets by 2024.
Global Competitors
Having a global footprint, GSK faces strong competitors worldwide.
Research and development in the healthcare sector play a vital parameter. It helps generate revenue for the company as well as saves and improves lives.
Merck & Co. Inc (NYSE:MRK) which is strongly rooted in the respiratory diseases drugs market has invested the most in the last quarter with 29.4%. Eli Lilly and Co (NYSE: LLY) also spent around 26%. Bristol-Myers Squibb Co (NYSE:BMY) and Novartis AG (XSWX:NOVN) had invested in the low twenties. GSK with its current 85 vaccines and medicines, spent 17.2% of its revenue on R&D.
Chugai Pharmaceutical Co (TSE:4519) which primarily deals in oncology spent 16.3%. Johnson & Johnson (NYSE:JNJ) had spent in mid-teens.
Operating margin for GSK and its peers
The above chart indicates that Chugai Pharmaceutical Co has the highest operating margin of 45.7%. Average being 24.6%, more than half of the companies have operating margins exceeding the average. GSK has an operating margin of 19.2%.
The numbers say it all !
As per data provided by GuruFocus, GSK's PE Ratio is 4.30 which is undervalued post the Q3 results compared to its peers average of 13.5x and the European Pharmaceutical industry average of 17.2x. GSK's enterprise-value-to-EBITDA ratio stands at 7.15 x, which is better than the industry median of 12.74 x and its enterprise-value-to-revenue ratio at 1.80 x is better than the industry median of 2.41x.
GSK’s dividend payments have increased over the past 10 years; Its current Dividend yield is at 5.97% and it is higher than the top 25% of dividend payers in the UK Market.
So, it has reasonable valuations and growing dividends that provide a good yield to investors.
Overall
GlaxoSmithKline is shaping up to grow stronger. Its consistent M&A activities help it focus on its core strength as well as spread its wings in complementary areas.
GSK’s financials provide it with the strength it needs. The company has consistently seen positive FCFF (free cash flows) in the past 10 years. Also, since 2017, the FCFF has been high enough to cover the dividend payments. So, the company is producing enough cash flows not only to invest in future growth in the form of capex but also to reward shareholders in the form of dividends.
In Q3 2022, GSK had 19.3 billion pounds of long-term debt. In comparison, it had about 7.1 billion pounds of cash and equivalents (equity and liquid investments). But the silver lining is that the company has been focused on maintaining financial discipline.
In Q3 2022 transcript, Emma Walmsley, CEO of, GSK said, “I’d also point us to the improving operating performance generation of cash flow as well as continually competitive distributions, but also some of the pay down of debt (and of course, we are helped by currencies).”
Overall, with strong cash flows, a focus on financial discipline, and bright growth prospects, GSK looks like a great investment opportunity. Also, its reasonable valuations and high dividend yield convey that possibly it's the right time to choose this stock for your portfolio.
Disclaimer/Disclosure
We do have a long position in the shares of GSK, either through stock ownership, options, or other derivatives. We wrote this article to express our opinions. We are not receiving compensation from any individual or entity for it.
You should not treat any opinion expressed in this article as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of our opinion. This is not investment advice. Before you invest in anything you might possibly read in our articles or those of the other people offering investment advice online, do your own research to verify the soundness of what you might have read. Please consult your investment advisor before making any decisions.
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