We previously covered GSK LON:GSK post-Haleon LON:HLN demerger, as 2022 drew to a close. GSK was facing a significant overhang from litigation fears over mis-sold medicines and investor scrutiny over years of corporate mismanagement.
We concluded that, whilst the business had faced multiple challenges, the recent spin-off of its consumer arm and a renewed focus on specialty medicines would be its best bet at shaking-off a track record of underperformance.
The pharmaceutical giant’s latest 4Q22 results suggest that we were on the right track.
Revenues down, business grows
In the final quarter of 2022, GSK produced total revenues of GBP7.4bn, a decline of 3% compared to the prior year. However, when stripping out Covid-19 related products, the core business grew at 9%.
For the full year, revenues grew at 13% to GBP29.3bn, and adjusted operating profit came in at GBP8.2bn, 14% higher than 2021, delivering an adjusted operating margin of 27.8%. This resulted in earnings per share of 139.7p, up 15% from 2021.
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Buoyant full-year results for GSK have come primarily from its vaccines segment. This is GSK’s largest revenue pool, where the company’s blockbuster drug Shingrix grew its sales by 60% to just shy of GBP3bn. Total sales in vaccines grew at 17% for the year to GBP7.9 billion.
Positive results were also seen in the specialty medicines segment, as sales of GSK’s HIV medicines performed particularly well across the year, with revenue from new product launches coming in ahead of expectations. GSK also noted a rarity in the industry, with some US pricing favourability leading to higher growth in the case of strongly priced medicines.
Profitability for the pharmaceutical firm was notably higher for the year, helped by operating leverage, as revenues grew strongly and fixed costs remained stable. Profits were also aided by a significant windfall from a settlement with Gilead Sciences NASDAQ:GILD over a patent dispute, where GSK’s HIV subsidiary ViiV Healthcare alleged that Gilead’s Biktarvy infringed their patents relating to GSK’s patented drug dolutegravir. Gilead agreed to pay USD1.25bn to GSK and a recurring royalty stream that analysts suggest will be worth in the realm of GBP1.4bn for GSK over the next few years.
During the year, GSK also received GBP446m in royalty income from Merck for sales of the HPV vaccine Gardasil.
Zantac fears abate
Whilst litigation proceedings over GSK’s legacy product Zantac remain underway in the US (with accusations that the drug caused cancer) a landmark federal case was won in GSK’s favour in December. A federal judge in Florida, managing a case with 50,000 claims, dismissed the Zantac litigation in a 300-page ruling, finding that the plaintiff’s experts didn’t use reliable methodologies to connect Zantac to cancer.
GSK is still exposed to state-level claims in the US. However, this substantial ruling both removes a large proportion of potential cases and sets a precedent for a likely dismissal of further cases down the line.
Trial readouts
GSK also noted during its results that 2023 is set up for a strong slate of clinical-trial readouts. The company has a total of five Phase III trials set for completion this year, with much of the focus on GSK’s RSV vaccine, which will publish results in the second half of the year. It is thought that RSV vaccine sales could potentially peak at the same levels seen for Shingrix, in the GBP3bn GBP4bn region.
Key branded drugs Blenrep and Zejula are also looking to pick up further approvals in haematology and oncology, respectively, with both products having Phase III readouts during the year.
Financial outlook
For the year ahead, GSK provided a confident outlook, stating sales would be 6% to 8% higher in 2023 with adjusted operating profit and earnings per share (EPS) expected to increase between 10% to 12% and 12% to 15%, respectively. Management confirmed that the dividend would be unchanged at 56.5p per share, resulting in a prospective dividend of 4% at the price of GSK at today’s close.
GSK opened trading today (3rd February) at 1,421.8p. The company has offered a -1.1% year-to-date return, a -13.9% one-year return with its shares ranging between 1,280.9p and 1,824.4p over a 52-week period. The company has a market capitalisation of GBP58.5bn.
Summary
GSK’s latest results mark a further milestone in the transformation of the business. Although somewhat challenging operationally, 2022 has been a great year for growth and profitability, with the key two business units, speciality medicines and vaccines, firing on all cylinders.
The investment outlook has now been significantly de-risked since we last looked at the company, with the federal ruling over Zantac landing in GSK’s favour. However, the shares remain largely unchanged in the 1430p to 1450p range.
With GSK’s latest guidance, EPS is forecast at 160p for the year ahead, resulting in an undemanding price to earnings ratio of 9x, well below GSK’s peer group. If GSK can continue to drive forwards with its turnaround, it is unlikely the shares will remain this cheap.
