GlaxoSmithKline – patience required

Investors may also question the timing of the strategy, which comes five years after close peer AstraZeneca (AZN) instigated a similar plan. But, arguably, GSK doesn’t have much choice. The pharma industry is changing and not investing in science is a mistake. These numbers are clear evidence of that. Revenues in the group’s pharmaceutical division were flat at £8.5bn, as sales from a small trickle of new drugs failed to offset a 23 per cent decline in revenues from leading asthma medicine, Advair. By contrast, the innovative vaccines business, which recently launched shingles treatment Shingrix, reported a 22 per cent increase in sales to £3.1bn.

GSK’s increase in R&D expenditure looks slightly worrying in the context of its financial stability. Interim net debt widened to £28.7bn from £23.9bn last year, sending finance costs up 29 per cent. The dividend – one of the main reasons many UK investors hold the shares – is also highly demanding. In the first half of 2019, the group paid out £2.1bn in dividends, which was uncovered by free cash flows of £535m – 35 per cent lower than last year.

But the balance sheet snapshot fails to capture the true picture of GSK’s financial health. Net debt rose when the company bought Novartis out of its consumer healthcare joint venture for £9.3bn, which has given it the freedom to spin the consumer division out into a separate company (alongside US pharma giant Pfizer). This will remove a big chunk of the debt, free up capital to invest in R&D and enhance the group’s operating margins.