GlaxoSmithKline’s [GSK] share price momentarily jumped to the highest level in over two years on Wednesday after management officially revealed a new chairman and tempered the forecast hit to full-year profits. But analysts are keeping a cool outlook as the company strives to turn higher research spend into profits.
GSK’s share price was largely unmoved on the announcement that Jonathan Symonds, deputy group chairman at HSBC [HSBC] with previous roles at Novartis [NOVN] and AstraZeneca [AZN], would be GSK’s new chairman. Reports of Symonds’s possible appointment had already come up two weeks ago, and shares largely priced that in having risen 1.6% on 16 July.
Shares initially jumped to a high of 1,701.60p on Wednesday after Q2 results were released, as the company forecast a smaller fall in profit. GSK expect adjusted full-year EPS to decline by between 3% and 5%, compared to a previous guided decline of between 5% and 9%. The brighter outlook was coupled with an earnings beat of 30.5p per share for the quarter.
But shares retrenched after their early afternoon spike and by Wednesday’s close were down 0.4% at 1,653.60p. Analysts are citing a still-lukewarm outlook for drug R&D, particularly as GSK heads to become a drug-only pharma company after the divestment of the consumer healthcare business.
Asthma drug dip offset by vaccines, immunity disease remedies
The overall decline in full-year earnings has largely stemmed from a sales hit to the asthma drug Advair, which was caused by the launch a generic rival. The drug, marketed as Seretide in Europe, accounted for £2.1bn of GSK’s £7.8bn revenue in Q2, with the bulk of that coming in from the US. But management said in February that sales would see increased competition after the US Food and Drug Administration approved the commercialisation of the country’s first generic competitor to Advair.
Luckily for GSK investors, the ongoing drop in Advair sales was largely offset by hiking revenues in the rest of the respiratory segment, which rose 12% to £752m. In the overarching pharmaceuticals category, drugs targeting immune-inflammatory disease also shone, with sales growing 32% to £151m. Outside of pharmaceuticals, the real star was shingles vaccine Shingrix, which brought in £386m. Overall vaccines turnover was up 23% to £1.6bn.
Total turnover from vaccines - a 23% increase
Consumer JV with Pfizer
As chairman, Symonds will need to steer GSK through the divestiture of its consumer healthcare arm, which is set to fold into a joint venture with US competitor Pfizer [PFE] and eventually spun off as a separate, listed entity. GSK’s consumer healthcare segment grew revenues 4% to £1.9bn over the quarter, buoyed by strong performance in India and South-East Asia.
|PE ratio (TTM)||41.88|
|Return on Equity (TTM)||161.84%|
GlaxoSmithKline share price vitals, Yahoo Finance, 26 July 2019
Following the divestment plan reveal in January, Jefferies analysts said they saw a rationale for the operation, particularly as a way to deleverage GSK’s books, whose debt stood at £28.7bn as of 30 June, up by some £5bn from a year earlier.
But the exit from consumer healthcare means the focus is now all on R&D for pharmaceuticals and vaccines. Investors are still waiting for a return on investment after GSK acquired US oncology research firm Tesaro for $5.1bn (£4.02bn) early this year. The acquisition forms part of a focus on cancer treatment to drive earnings, but it’s yet to convince some analysts: Morgan Stanley wrote last month that while Tesaro’s assets will give GSK “greater critical mass”, “commercial risk in oncology will remain high”, and called GSK’s turnaround “very much a work in progress”.
The buy-side isn’t too convinced either: “We aren't going to get too carried away,” Charlie Huggins, manager of the Hargreaves Lansdown Select UK Income Shares fund, which has a stake in GSK, told Reuters, reiterating his vision that “confidence in GSK’s drug pipeline is still fairly thin on the ground”.
GSK shares trade at 14.90 times forward earnings, compared to 13.94 for Pfizer and 15.34 for Germany’s Merck.