GSK has grown third-quarter sales by 2% to £8.0bn, excluding currency movements. A 15% decline in vaccine sales was more than offset by growth in both General and Specialty medicines.
Underlying operating profit rose by 5% to £2.8bn, driven by revenue growth and effective cost management. Underlying earnings per share also grew 5% to 49.7p, ahead of market forecasts of 43.5p.
Free cash flow fell 20% to £1.3bn largely driven by the acquisition of rights to certain vaccine technologies. Net debt has fallen from £15.0bn to £12.8bn since the start of the year.
GSK recognised a £1.8bn charge in relation to the Zantac settlement, with the ‘vast majority’ of cases now settled.
With all full-year guidance unchanged, pointing to underlying operating profit growth in the 11-13% range.
The third-quarter dividend rose from 14p to 15p.
The shares were down 3.6% in early trading.
Our view
GSK’s on track to meet upgraded estimates despite ongoing weakness in it’s vaccine portfolio. Two key products, Arexvy and Shingrix were coming up against headwinds in the important US market. But both products still have the potential to reach new patient populations.
The financial progress is underpinned by excellence in research & development that’s seen 11 positive late stage clinical updates so far this year, and is expected to yield five major product approvals next year. However, there can be no guarantee of continued success. Falling sales of COVID-19 medicines have held back growth but now that they are no longer material, comparatives are becoming less demanding.
Beyond vaccines, the group also has a strong presence in HIV treatments which make up about 20% of total revenues. Its newer HIV treatments are a key part of GSK's future, as generic competitors eat away at pricing power for some of the group's legacy treatments. But the group focus for HIV is shifting to long-acting innovation therapies. And it’s these that have helped capture additional market share and drive double-digit growth for the category in the first half. Apretude is another important product to watch in the space. It’s the only approved medicine in its class and real-world studies have shown it to be 99% effective at preventing HIV infections.
Cancer treatment, although relatively small in terms of current sales, is growing rapidly. Recent approvals and launches in new markets mean there are strong growth drivers for the existing portfolio. The development pipeline looks promising.
Net debt has been coming down and currently sits at under 1.3x forecast cash profits, which we don't see as a major concern. The strong financial position and improving cash generation helps support a prospective dividend yield of 4.4%, but remember, no future payouts to shareholders can be assured.
GSK's valuation is below the long-term average, and significantly less demanding than many of its peers. One reason it’s been held back was uncertainty over the financial impact of alleged cancer links to its heartburn drug Zantac. News that the majority of lawsuits relating to were being settled for $2.2bn materially de-risks the investment case.
Looking ahead, strong execution of the growth strategy and clinical pipeline is likely to be the key focus for shareholders moving forward. So far so good, but remember, the drug approval process is long and expensive, with many treatments never seeing the light of day.
Environmental, social and governance (ESG) risk
The pharmaceuticals sector is relatively high-risk in terms of ESG. Product governance, particularly with safety and marketing, and affordable access to treatment are the key risk drivers. Labour relations, business ethics and bribery and corruption are also contributors to ESG risk.
According to Sustainalytics, GSK's overall management of material ESG issues is strong. There's an independent, board-level, corporate responsibility committee focused on ESG performance and framework and 10% of executive pay is tied to ESG metrics. It's ranked first on both the Access to Medicine Index and Access to Vaccines Index thanks to industry-leading efforts to ensure medicines and vaccines are provided to patients in need. Management practices concerning the transparency of clinical trials are strong, and it's committed to international standards. But despite a strong product safety programme, GSK lacks external quality management certification at its manufacturing sites.
GSK key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
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