GlaxoSmithKline continues to shine

At the same time, GSK is looking into how its existing medicines might be repurposed to alleviate the symptoms of the new coronavirus. And it has partnered with Vir Biotechnology to see whether antibodies – protective proteins in the blood which neutralise pathogens – can be used as a treatment or a preventative against the virus. The group is also working to support the UK’s Covid-19 diagnostics infrastructure.

We cannot know yet whether a remedy for the virus will be found. And even if there is a eureka moment, GSK does not expect to profit from its adjuvanted vaccine collaborations. But even so, GSK’s efforts to tackle the pandemic have underscored the breadth of its operations, and its dominance in multiple arenas. Last year alone it delivered 2.3bn packs of medicines, along with 701m vaccine doses.

Such sector leadership is one of the attributes that has made GSK the most popular top five holding of the top performing sustainable UK equity funds followed by our Ideas Farm "Best Ideas" screen. Ketan Patel, manager of the ethical ‘Amity UK’ fund, which counts GSK as its fourth largest holding, also points to GSK’s defensive business model, with low debt, high margins, strong cash flow and sustainable income.

GSK delivered strong results for the first quarter of 2020, with total revenues up by 19 per cent to £9.1bn. Vaccine revenues similarly climbed by 19 per cent, reaching £1.8bn – bolstered by particularly good growth in the shingles disease area. Meanwhile, underpinned by coronavirus-driven stockpiling, pharma sales increased by 6 per cent to £4.4bn – with sales of respiratory products up 38 per cent to £871m and HIV-related products up by 8 per cent to £1.2bn. This helped to temper the 7 per cent contraction in ‘established pharmaceuticals’, which was knocked by factors including the ongoing impact of a loss of exclusivity for asthma drug Advair.

That said, GSK is working hard to ramp up its research and development (R&D) pipeline, which should help to power growth in the years to come. It had 37 medicines in development at the time of its Q1 numbers, along with 15 vaccines. Total R&D expenditure rose by 18 per cent to £1.2bn over the quarter – reflecting an intensifying focus on the oncology space, as well as restructuring. This followed on from £4.6bn of R&D spend in 2019.

This investment ties into the group’s two-year strategy to create two separate organisations. The first, ‘New GSK’, is a biopharma company focusing on science related to the immune system, human genetics and the use of advanced technologies such as machine learning and cell therapy. The second is a consumer healthcare company, established via a joint venture (JV) between GSK and US giant Pfizer (US:PFE).

The JV brings together both groups' consumer divisions – combining GSK’s Sensodyne toothpaste and Panadol painkillers with Pfizer’s Advil and Centium brands – in a structure majority-owned by GSK. Ultimately, the plan is for the enlarged consumer business to achieve its own stock market listing.

Spin-off aside, GSK’s strong operating leverage – the degree to which revenue growth translates into profits – meant that the first-quarter operating margin edged up from 18.6 per cent to 22.1 per cent, with an adjusted margin of 29.4 per cent. All being well, the group’s promising pipeline will lead to an expanding medicine cabinet – meaning that those margins may yet improve further, supported by enhanced intellectual property and increasingly robust barriers to entry.

Meanwhile, first quarter free cash flow rose from £165m to £531m - hot on the heels of £5.1bn reported last year. That underpins the group's generous dividend policy, although GSK will maintain the annual payout of 80p until it achieves cash flow cover of 1.25-1.5 times.