- GSK’s vaccine business looks strong
- The company appears lowly-rated and well-positioned, according to Simon Gergel
Simon Gergel, portfolio manager of the Merchants Trust (MRCH), explains why the trust invests in pharmaceutical giant GSK (GSK):
“I think the market has underestimated the transformation GSK has been undergoing. It demerged its consumer health business, Haleon (HLN), which we also like. It has a very strong vaccine business, which is growing rapidly thanks to its shingles vaccine and the recent RSV vaccine. It also has strong positions in the HIV and respiratory sectors, but [the shares] are trading on a very modest valuation because investors are nervous about a lack of pipeline, a lack of growth, some patent expiries in three or four years’ time and liability risk.
“Admittedly, the pipeline is not great and it has not been the most successful company at developing it. But I think that’s a bit harsh, because the company has actually delivered two fantastic products on the vaccine side. Vaccines have a very long duration. Because of the way they work and the way the industry works, once a company gets an entrenched position in the sector, it is very hard for it to lose it. You don’t have the same patent cliff you get with typical drugs.
“GSK also has some other drugs coming through the pipeline. It has been pretty good at bringing in new products for the HIV portfolio, which can replace those that are going off-patent. I think they have done a good job at rebuilding that franchise, so that the patent cliff is not going to be as significant as the market thinks.
“On the product liability side, the company is involved in a litigation about whether heartburn drug Zantac is potentially carcinogenic. But when that litigation has come to trial, for example in Florida, the case was thrown out. The evidence is pretty weak. There are potentially some cases in California, but all in all, this seems to be becoming less of an issue. The market is still nervous about Zantac, but we don't see a very high risk of a large settlement.
“If you put all that together, you have a business that is quite well-positioned for the long term, is very lowly rated, generates good cash flow and is not economically sensitive at a time when people have economic concerns.”
GSK was the Merchants Trust’s largest holding as of the end of 2023 and made up 4.6 per cent of the portfolio. The company accounts for 2.5 per cent of the trust’s benchmark, the FTSE All-Share.
