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GSK initiates plan to split

The pharma giant will separate into a consumer healthcare business and R&D-focused biopharma company over the next two years
February 5, 2020

Having upgraded full-year guidance in October 2019, GlaxoSmithKline's (GSK) adjusted EPS growth of 1 per cent at constant currencies was in line with forecast flat year-on-year performance. But at 123.9p, it came in below company-compiled consensus of 125p. The group expects EPS to fall by 1-4 per cent in 2020 as lower revenue from pharmaceuticals offsets continuing growth in shingles vaccines sales. Meanwhile, the broker consensus guides for EPS of 96.9p, rising to 108p in 2021.

IC TIP: Buy at 1,771p

Last year saw turnover from established pharmaceuticals dip 8 per cent to £8.8bn reflecting generic competition to its asthma drug Advair. With that in mind, £3.3bn was spent on pharmaceuticals research and development (R&D) to bolster the development pipeline and GSK expects at least six potential drug approvals this year. The 16 per cent constant currency increase in R&D spending was driven by higher investment in oncology treatments.

Over the next two years, the pharma giant will split in two, spinning out its consumer healthcare joint venture with Pfizer and leaving an R&D-focused biopharma company. The restructuring is expected to cost £2.4bn although £1.6bn in cash costs will largely be covered by disposals.    

Still aiming for a free cash flow dividend cover of 1.25-1.5 times before increasing the payout, free cash flow came in 11 per cent lower at £5.1bn. Meanwhile net debt rose by 17 per cent to £25.2bn on the back of the £3.9bn acquisition of oncology-focused Tesaro and the recognition of £1.3bn in lease liabilities.

GLAXOSMITHKLINE (GSK)  
ORD PRICE:1,771pMARKET VALUE:£ 88.4bn
TOUCH:1,770-1,771p12-MONTH HIGH:1,857pLOW: 1,476p
DIVIDEND YIELD:4.5%PE RATIO:19
NET ASSET VALUE:240p*NET DEBT:137%**
Year to 31 DecTurnover (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)
201523.910.517480.0
201627.91.918.880.0
201730.23.531.480.0
201830.84.873.780.0
201933.86.293.980.0
% change+10+30+27-
Ex-div:20 Feb   
Payment:09 Apr   
*Includes intangible assets of £41.5bn or 832p a share, **Includes £1.3bn in lease liabilities