- Company now expects sales growth of 8-10 per cent CER (up from 6-8 per cent)
- Shares have faltered as the full impact of Zantac litigation is still unknown
At first glance, GSK’s (GSK) third-quarter results give investors plenty to feel bullish about. The company’s £7.8bn turnover in the three months to the end of September exceeded analyst expectations by 7 per cent. Its adjusted operating profit of £2.6bn came in 13 per cent above consensus. Management has consequently hiked profit and sales guidance for the second consecutive quarter.
GSK’s vaccine division was its standout performer, mostly due to better-than-expected sales of its Shingrix shingles jab, which offset small misses elsewhere. The firm’s portfolio of HIV treatments – which earned it nearly £1.5bn – also came in about 1 per cent ahead of consensus.
Chief executive Emma Walmsley said she foresees “good momentum” in 2023 as Shringix expands its global footprint and new products – including a highly anticipated respiratory syncytial virus (RSV) vaccine – reach the market. Last month, the company reported that the jab displayed an efficacy of 82.6 per cent in a phase III trial. Meanwhile, a rival vaccine from Pfizer (US:PFE) was shown to be 66.7 per cent effective against RSV-associated lower respiratory tract illness.
The virus is one of the last major infectious diseases without a vaccine and is a leading cause of pneumonia in infants and the elderly. Competition to produce a jab is likely to be fierce, with Moderna (US:MRNA) and Johnson & Johnson (US:JNJ) also working on their own respective candidates. Analysts at Jefferies have said that sales of GSK’s vaccine could peak at $2.5bn (£2.17bn), provided it receives regulatory approval.
Markets reacted positively to GSK’s third-quarter data, with its share price edging up during early trading. However, the shares are still down almost 9 per cent in the year-to-date after they plunged in August on litigation fears. Thousands of legal cases have been filed in the US over Zantac – a heartburn drug originally manufactured by an earlier incarnation of GSK – which is alleged to contain a probable carcinogen.
The drug was manufactured and sold by a number of other big pharma companies, including Pfizer and Sanofi (FR:SAN), beginning in the 1980s. It was subsequently recalled in 2019. GSK set aside £45mn in the third quarter for Zantac-related legal fees.
The firm also benefited from a few one-offs in the three months to the end of September, including the demerger of its consumer arm, now known as Haleon (HLN), which boosted earnings per share. Currency tailwinds also helped matters.
Analysts at Shore Capital see a “value disconnect” between GSK’s share price and its near-term growth prospects. The shares trade on a price/earnings multiple of 10.5 times for the 2023 financial year, while its peer group trades on an average of 15.9 times, says the broker, implying a significant discount.
Questions around the strength of the company’s long-term pipeline, and the impact of Zantac litigation, remain. But for now we feel things are looking up. The question over the litigation acts as an obvious disincentive for prospective investors, but given the fall-away in market value since August, a speculative position may be warranted given near-term clinical prospects. A cautious buy at 1,464p.
Last IC View: Hold, 1,745p, 27 Jul 2022
