It has been a busy time for Emma Walmsley, CEO of GSK LON:GSK, as the business forges its new corporate structure after the spin-off of its consumer health company Haleon LON:HLN earlier this year. During her tenure, Walmsley has overseen multiple acquisitions, increased investment into R&D and, notably, defended GSK from activist investors who requested a more aggressive strategy from the blue-chip pharmaceutical firm.
Despite the hectic macroeconomic backdrop of 2022, Walmsley will be breathing a sigh of relief, as GSK delivered some solid numbers in its third quarter (released to the market on 2nd November). GSK delivered 9% revenue growth at constant exchange rates (CER) and adjusted operating profit growth of 18% to GBP2,605m. Strong performance from GSK’s specialty medicines business and standout growth from GSK’s Shingrix vaccine has led management to upgrade forecasts for full year results for the second time this year. GSK now expects sales growth in the range of 8% to 10% and adjusted operating profit growth of 15% to 17%.
With the demerger complete, the ‘new GSK’ is a business with three succinct units: General Medicines, which houses GSK’s legacy respiratory business, fighting diseases such as asthma and COPD; Vaccines, where GSK is the global leader in prevention of diseases such as hepatitis and diphtheria; and lastly, Specialty Medicines, a focus area of investment for GSK, with products aimed at treating complex diseases in the fields of oncology, immunology and HIV.
Speciality medicines
As of the third quarter, the best performing segment was specialty medicines, growing 24% at CER. It was boosted by the double-digit growth of Benlysta and Nucala, which are two immunotherapy treatments. The growth of the speciality medicines segment was significantly enhanced by GBP411m in sales of Xevudy, a monoclonal antibody approved to treat serious Covid-19 infections.
GSK’s vaccine business grew 5% during the reporting period, as stellar growth in GSK’s Shingrix vaccine of 36% to GBP760m was offset by weaker sales of vaccine adjuvants (substances added to Covid-19 vaccines to boost their efficacy) that were in popular demand during the same reporting period last year.
Acquisitions bear fruit
Just a year into Walmsley’s tenure as CEO of GSK, the new leader announced a transformative acquisition, the USD5.1bn purchase of Tesaro, a small biotech company behind the discovery of oncology treatment Zejula. At the time, the deal was scrutinised by the market, erasing USD10bn of equity value from GSK on the day of the announcement. GSK had sold its oncology division to Novartis in 2015, so the company re-entering the field just three years later was seen as a misstep.
However, since GSK’s acquisition of Tesaro, Zejula has picked up a number of use indications in ovarian, breast and lung cancer, furthering the applied use of the drug. Zejula is on track for sales of GBP500m in 2022 and will become a key growth pillar for GSK over the next few years.
As GSK has been relieved of its consumer health unit during the separation, this has granted management the financial flexibility to undertake two additional acquisitions, Sierra Oncology, bought for USD1.9bn in April 2022, and Affinivax, bought for up to USD3.3bn in May 2022. These two acquisitions aim to bolster the prospects for GSK’s oncology business and vaccine business, respectively.
Investor scrutiny
It should come as no surprise that GSK has been a perennial underperformer for investors. The company has delivered no capital appreciation in its share price over the last decade. The fact that GSK has a portfolio of market-leading assets – such as a portfolio of vaccines where 90% of products have over 90% efficacy rates – has led investors to infer that gross underperformance from GSK’s management team has led to stagnant returns compared to GSK’s peer group.
In a well-publicised letter in June 2021, Elliott Management highlighted GSK’s ‘underappreciated potential’, which could be restored by improving credibility and strengthening GSK’s ambition to outperform. Within the letter, Elliott requested more robust processes for board governance and the potential for re-evaluation of the executive leadership team.
In February 2021, during Elliott Management’s research process, it surveyed a number of investors for their perceived quality of the industry’s management teams. GSK scored the lowest result of industry peers, outlining a vast credibility gap.
Source: Elliott Management – Letter to GSK (Sell side survey respondents n=64)
At the time, GSK issued a strong rebuttal to Elliott’s concerns, with the board defending the leadership of Emma Walmsley and doubling down on recently set targets to deliver sales of more than GBP33bn by 2031, nearly GBP5bn more than is expected from GSK in 2022.
There are reasons to be hopeful that GSK will manage to achieve a rejuvenation of its growth. Results for the third quarter showcase significant demand for GSK’s more novel therapies. Sales of Shingrix are set to grow to GBP4bn by 2026 and GSK has an RSV vaccine earmarked for upcoming approval, which could exhibit similar levels of growth as Shingrix in the range of GBP3bn to GBP5bn. Looking further ahead, GSK’s pipeline is burgeoning, with 22 Phase III trials expected to be delivering results in the next couple of years, which could potentially add significant firepower to GSK’s speciality medicines portfolio.
For now, investors remain sceptical about GSK’s prospects, with the shares stuck at the midpoint of GSK’s infamous 1,200p to 1,800p range. The company opened trading today at 1,440.7p and has offered a -9.8% year-to-date return and a -7.7% one-year return with shares ranging over a 52-week period between 1,280.92p and 1,824.4p. The company has a market capitalisation of GBP58.9bn.
Litigation worries over Zantac, highlighted in our recent article on GSK’s consumer spin off Haleon, hasn’t helped matters for GSK as it attempts to restore credibility with investors.
Given GSK’s lacklustre share price performance, the company is valued very cheaply at approximately 10x forecast earnings in 2023. We can’t be certain if Emma Walmsley will succeed in revitalising the prospects for GSK and restoring shareholder value; however, when compared to years prior, the odds look stacked in Walmsley’s favour.
