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GSK slashes dividend as it outlines growth prospects

The pharma giant presented targets at its hotly anticipated investor day on 23 June
GSK slashes dividend as it outlines growth prospects
  • Glaxo anticipates revenue CAGR of more than 5 per cent between 2021-26 with sales exceeding £33bn in 2031
  • The investor event came amid rising pressure on the investor register, after it emerged earlier this year that activist Elliott had built a stake

GlaxoSmithKline (GSK) expects to deliver “highly attractive growth” over the next five years, chief executive Emma Walmsley said as she outlined “new commitments” on a much-anticipated investor day set against a background of rising shareholder pressure.

The FTSE 100 pharma giant hopes to achieve compound annual sales growth of more than 5 per cent by 2026, with adjusted operating profit growth of more than a tenth. The company's optimistic forecasts mean revenues are expected to exceed £33bn in a decade’s time.

New vaccines and specialty medicines will drive that momentum, management said, building on a platform of changes which the group has made since 2017 to “address historic long-standing issues that have affected performance”.

“I am very aware that GSK’s shares have underperformed for a long period”, Walmsley said as she presented the group’s plans. But “the transformation achieved over the last four years creates a completely different platform for growth and significant shareholder value”.

GSK’s shares, which rose 3 per cent on the day of the event, are down more than a tenth since Walmsley took the helm in early April 2017. They are down roughly 5 per cent since the group announced the demerger of its consumer healthcare business, which is tied up in a joint venture with Pfizer (US:PFE), in December 2018.

Countering generic pressure

Between 2021 and 2026, the impact of drug patent expiration will be negligible, Walmsley said, comparing favourably to peers. But GSK will lose exclusivity on its dolutegravir-based HIV drugs in 2028 in the US and 2029 in Europe – products which contributed £4.7bn to sales last year (13.8 per cent of the total top line).

Still, in time the group expects that loss of exclusivity to be “more than offset” by contributions from GSK’s late-stage pipeline, Walmsley said. She added that the group’s growth projections ignore any contribution from early-stage pipeline assets, business development or possible contributions from Covid-19 related drug development.

‘New GSK’, the pure biopharma business which will be left behind when the group spins out its consumer healthcare business as planned, will prioritise research and development (R&D). Jabs and specialty treatments are expected to reach around three-quarters of company sales by 2026 – helped by an existing pipeline of 20 vaccines and 42 medicines.

Already, Walmsley noted, GSK has delivered 11 major product approvals since 2017 – a “top quartile performance”. It believes that some of its late-stage development assets could together deliver peak year sales of more than £20bn on a non-risk adjusted basis.

Roger Connor, head of GSK’s vaccines business, pointed to 16 assets in mid- and late-stage development, with five new launches expected by 2026. He said that a vaccine for RSV (Respiratory Syncytial Virus) in older adults was “most important” with an estimated £5bn market.

He added that rather than presenting a challenge, messenger RNA (mRNA) – the basis of approved Covid-19 jabs developed by Pfizer, BioNTech (US:BNTX) and Moderna (US:MRNA) – is a “massively exciting technology”. It constitutes a “major opportunity for the future”, which is “why we are investing in it significantly”. Connor noted that GSK is advancing its portfolio of mRNA and antibody candidates to help double flu-related revenues in the next decade.

That said, the biggest contributor to vaccine sales will be Shingrix, its shingles vaccine which is expected to double revenues in the next five years. The group also aims to double its meningitis-related sales.

Consumer demerger

Meanwhile, the split out of New GSK and consumer healthcare is still expected to take place midway through next year. But now shareholders have a greater sense of what that separation will look like. Dependent on investor approval, GSK depicted the transaction as a “demerger of at least 80 per cent of GSK’s 68 per cent holding” in the consumer business to GSK shareholders. The new consumer health company’s shares are expected to list on the London Stock Exchange with American depositary receipts to be listed in the US.

New GSK will maintain up to 20 per cent of GSK's stake in the consumer health business. Management says it will maintain this as a “short-term financial investment”, aiming to “monetise” it “in a timely manner”.

The separation “will create a new world leader in consumer healthcare”, said Walmsley, pointing to nine global power brands, a major sales presence in the US and China and 11 other brands which each make more than £100m in sales. She added that the business would boast industry-leading operating margins.

Dividend cut in line with expectations

GSK had already signalled to investors that it would cut the dividend next year. At its investor event, it said that the biopharma business and the new consumer health business would pay out an aggregate 55p to shareholders for 2022, given the mid-year timing of their split, assuming that the latter division’s dividend is at the lower-end of the pre-announced 30-50 per cent anticipated pay-out range (the proportion of earnings that a company pays out as dividends).

Subsequently, the biopharma business will target a ratio of 40 to 60 per cent, starting at 45p a share in 2023. Brokerages Berenberg and Liberum had been expecting a pay-out ratio of roughly 40 per cent leading into the investor day. Last year's dividend stood at 80p a share.

A lower payout should facilitate greater investment in R&D and could enable further transactional activity to bring in new forms of treatment to the pipeline. Earlier in June, GSK agreed a deal with Nasdaq-quoted biotech firm iTeos (US:ITOS) to collaborate on a new cancer treatment. GSK will pay iTeos up to $2bn (£1.4bn) for the deal.

The upshots

As reported by the Financial Times in April, activist hedge fund Elliott Management has built a multibillion-pound stake in GSK and has been pushing for change.

Still, The Times reported in late May that Elliott would not attempt to push for a sale of New GSK’s vaccines and pharma businesses, after an earlier report suggested that Westminster was worried about a potential takeover of GSK amid the uncertainty sparked by Elliott’s involvement.

In any case, while the market may have reacted positively to the intentions laid out by GSK, it remains to be seen how far the more cynical among its investors believe that it can achieve those goals, or indeed whether they deem them ambitious enough. The pressure hasn't waned yet; if anything, a lower dividend puts even more onus on the group to deliver on its targets.