Yahoo Finance Investors may be sceptical, but this unloved stock has much to offer – and a lowly valuation
Here is an unloved stock that offers a new group structure, the potential resolution of legal woes, the presence of an activist investor, a clear strategy, a building pipeline of vaccines and medicines – and all with a lowly valuation.
Welcome to GSK, GlaxoSmithKline as was, where we may have been early but we could yet receive a reward for our patience.
After a series of major corporate transactions, the last of which was 2022’s spin-off of consumer healthcare giant and fellow FTSE 100 specialist Haleon, GSK is now focused purely on the development and sale of medicines and vaccines. That immediately offers the prospect of exposure to tempting demographic trends such as population growth (in developing markets) and increased longevity (in developing and developed arenas).
The relatively predictable demand, high margins and consistent cash flow that can result from a successful drug development model can also appeal at times of economic uncertainty (and all the more so during a recession).
If a company hits the jackpot with a blockbuster drug in a key area, as is the case at Denmark’s Novo Nordisk with Saxenda and Wegovy in the field of obesity, AstraZeneca with lung cancer treatment Tagrisso and America’s Bristol-Myers Squibb with the anti-coagulant Eliquis, the revenues, earnings and cash flows can really blossom.
Novo Nordisk and AstraZeneca both trade on about 30 times forward earnings and Bristol-Myers Squibb comes on an earnings multiple in the mid-teens, well above the 11 times rating currently afforded GSK by the market.
That valuation disparity highlights the investment opportunity at GSK, although it speaks of the risks, too. Bristol-Myers
Squibb comes on a lower valuation than the other two because its cancer drug, Revlimid, is now drawing competition from cheaper generic drugs, as it comes off patent; and Eliquis and another cancer treatment, Opdivo, will face the same challenge later this decade.
Pharmaceutical companies cannot afford to rest on their laurels and must constantly replenish their pipeline of new treatments, by research and development or acquisition.
GSK is doing both. The company, led by chief executive Emma Walmsley since April 2017, spent £5.5bn on R&D in 2022, while it has purchased Tesaro for $5.1bn (£4.1bn), Affinivax for a maximum of $3.3bn and Bellus Health for $2bn since 2019 – the last-named deal, for a cough drug specialist – was announced just last month.
All of this is geared towards building that all-important pipeline. Investors are still clearly sceptical, as evidenced by that yawning discount valuation. But GSK has received regulatory approval for more than 20 new drugs since 2018.
Better still, it has 23 vaccines and 42 medicines in development and undergoing phase I, phase II or phase III trials. Not all of them will make it to market by any means but the company is targeting four potentially high-growth areas – infectious diseases, HIV, immunology and oncology.
GSK raised sales and profits guidance twice last year and although last week’s first-quarter results received a muted response, revenues still grew by 16pc, excluding the fall in Covid related sales, thanks to shingles treatment Shingrix, lupus drug Benlysta and asthma medicines Nucala and Trelegy.
As a result, management is sticking to its near-term guidance for this year and – more importantly – the long-term goals of compound trend sales growth of more than 5pc a year and compound adjusted operating profit growth of more than 10pc per annum, as profit margins expand.
If those targets can be met, the 11-times earnings with a yield of about 4pc looks like a tempting price, especially as the balance sheet is less stretched than before.
When Haleon was spun off, it took some of GSK’s debt with it. That reduces risk and gives the firm more scope to invest, or even acquire.
Drug approvals and earnings growth are two potential catalysts for share price performance. A third is a resolution to a legal case involving GSK’s heartburn drug, Zantac, the subject of lawsuits that claim it causes cancer. A Florida judge dismissed thousands of lawsuits in December on the basis that the science was weak.
The next major hearing in the USA is due to take place in California in July. Two partners, Pfizer and Sanofi, have settled in California.
GSK could prove too cheap for all of the near-term uncertainties.
Questor says: buy
Ticker: GSK
Share price at close: £14.55
Russ Mould is investment director at AJ Bell, the stockbroker
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