Key Points
- GSK shares are down 10% year-to-date.
- GSK completed the demerger of its Consumer Healthcare business to form Haleon.
- GlaxoSmithKline got approval for three major products.
GSK Plc (LSE:GSK) shares fared well in 2021, rising by nearly 20%. But it wasn’t just the stock that had a stellar performance. Strong commercial execution drove growth across the company as well.
But in 2022, this share price performance seems to have reversed, with the market capitalisation tumbling 10% year-to-date. On the surface, this seems problematic. But quite a lot has changed, with its consumer healthcare division spun out into its own independent enterprise.
Let’s take a closer look at what’s been happening. And is the fall in valuation a buying opportunity for my portfolio?
The business model
GlaxoSmithKline, or GSK Plc as it’s now known, is a healthcare company with a history tracing back to 1715. But the company, in its modern form, originated much sooner in 2000 as a merger between Glaxo Wellcome and SmithKline Beecham.
Today GSK shares are listed on both the London Stock Exchange and New York Stock Exchange. The business is focused on discovering, developing, manufacturing, and marketing pharmaceutical products worldwide, employing more than 90,000 people.
The group’s product portfolio is impressively diverse and includes medicines of various therapeutic classes that treat diseases across a broad range of categories.
The list includes antivirals, respiratory, central nervous system, metabolic, antibacterials, cardiovascular and urogenital, dermatology, rare diseases, immuno-inflammation, vaccines, human immunodeficiency virus (HIV) and cancer medicines, as well as general medicines.
Until recently, the group also had an entire consumer healthcare segment. However, in July 2022, this division was spun off as a standalone company called Haleon Plc.
Haleon was formed as a joint venture with Pfizer. And it’s now listed as a publically traded company on the London Stock Exchange under the ticker (LSE:HLN). GSK still retains a 13.5% equity stake, while Pfizer owns 32%. GSK shareholders hold the rest.
The combination of the two companies’ divisions makes Haleon the largest consumer healthcare business in the world. And the separation of assets, revenue, and cash flow of this operation is primarily responsible for the drop in the GSK shares this year.
That being said, how has the underlying business been performing?
GSK shares versus earnings
2021 was a strong year for the pharmaceutical group. At least, that’s the impression I got looking at the numbers.
Sales increased by 5%, while the adjusted EPS jumped by 9%. The pharmaceutical segment grew by 10%, and the New and Specialty Medicines expanded by 26%. Meanwhile, management achieved double digits sales in its Immuno-inflammation, Respiratory and Oncology divisions, all driving strong performance last year.
GlaxoSmithKline has three strategic areas. And in 2021, the company experienced excellent progress across each of them.
- In innovation, the company delivered three major product approvals. These products are added to the company’s exciting, high-value pipeline across its prevention and treatment of disease through organic and inorganic delivery.
- In performance, the GSK investment in commercial execution of speciality medicine and vaccines has helped improve sales growth.
- Lastly, on trust, the company has continued to maintain sector leadership in ESG, with the No. 1 ranking in the Dow Jones Sustainability Index, and continues to maintain its longstanding leadership in the Access to Medicine index.
Skipping ahead to the latest Q3 2022 results, the strong financial performance continues.
GSK beat analyst estimates by a wide margin, with earnings and revenue coming in 20.2% and 8.5% higher than expected, respectively.
- Earnings per share of £1.07 versus expectations of £0.89
- Reveue of £7.83bn versus expectations of £7.21bn
On the back of these tremendous results, the company declared shareholder dividends of 13.75p.
Commenting on the results, CEO Emma Walmsley stated, “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”.
That certainly sounds encouraging. So, does that make GSK shares a good investment today?
Risks lying ahead
With a price-to-earnings ratio a little above 14, I see the GSK shares at their current price to be fair. Aside from that, the company’s finance is very strong, with over £4.4bn as free cash flow at the end of 2021.
Moreover, the group has been quite busy as it has rolled out new products. This product should improve the revenue of GSK and, subsequently, the shares. Having said that, there are some notable risks to consider.
The pharmaceutical industry remains a highly competitive arena. And the process of developing new medicines is not only difficult but also exceptionally expensive.
With the spin-off of its consumer healthcare division, GSK now resembles much more a pure-play drug developer. While that does open the door to higher growth opportunities, it also means the impact of a failed drug is now far more significant than before.
Similarly, with income originating from drug sales, the expiration of patents followed by a flood of generics onto the market also puts further pressure on the group if it can’t keep delivering a steady stream of new drugs.
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Is buying GSK shares a good investment?
GSK is a large-cap company with a market cap of £58.91bn. It has a price-to-sales P/S ratio of 2.39 and a price-to-earnings P/E ratio of over 14. From a relative valuation perspective, that seems reasonably priced, in my opinion.
GSK has over 4 billion common shares outstanding and is owned by over 105 thousand investors. About 43% of the shares are actually held by financial institutions, with 0.73% owned by insiders.
Personally, I prefer seeing a higher level of insider ownership. But given the size of this enterprise, this small figure isn’t entirely surprising. The group’s largest shareholder is Dodge & Cox International Stock Fund, with a 1.61% holding as of 30th September 2022.
Furthermore, GSK shares are sitting comfortably near the middle of its 52-week range between 1,280.90p and 2,746.59p. But based on current analyst consensus, the stock might be trading towards the higher end of this range within the next year. In fact, based on the forecasts of 29 investment analysts, GSK stock has a price target of 1,700p.
With all that said, is this business a good investment for my portfolio? In my opinion, yes. There remain some significant short-term uncertainties as the business acclimatises to its new operational structure. And the shift towards becoming a pure-play drug developer does elevate its historical risk profile.
However, with decades of pharmaceutical experience and plenty of financial resources at its disposal, I believe GSK is in a strong position for long-term success. That’s why I’m considering adding this business to my portfolio once I have more capital at hand.
Learn more about GSK Plc
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Prosper Ambaka does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.
