Haleon [LSE:HLN], the recently listed spin off of GSK’s consumer healthcare unit has had a tumultuous first few months on the stock market.Such a consumer staples business is typically revered for its reliable growth and defensive characteristics, however Haleon now languishes 20% below its listing price, and sits at nearly half the £50bn Unilever plc was willing to pay to snap up the Panadol maker earlier this year. Should investors look to snap up this promising healthcare play?
Listed back in July, Haleon held a lot of promise for potential investors. With consumer health competitors such as Reckitt Benckiser and Johnson and Johnson operating as conglomerates with other divisions (Household cleaning for Reckitt and Pharmaceuticals for Johnson and Johnson), Haleon was set to be the only listed, pure play over the counter (OTC) healthcare player.
Consumer health groups that sell OTC brands can establish highly lucrative businesses, that are highly sought after by investors. Consumers become loyal to well known brands, even when cheaper alternatives are present. Higher margins delivered by branded OTC products also mean retailers look to stock well known products such as Voltarol or Calpol compared to their white label alternatives. This dynamic can be seen in Haleon’s impressive margins, with the company expected to deliver an operating margin of 22% in 2022.
Haleon posts robust half year results
Since listing, Haleon updated the market with robust half year results on the 27th of July. H1 revenue increased +13.4% to £5,188m and the company delivered organic revenue growth of 11.6%. Growth was attributed to 3.7% price and 7.9% volume and was healthily ‘broad based’ across all categories and geographic segments. Haleon confirmed several synergies continue to be found between the Pfizer and GSK teams that were merged to create Haleon, and that results for full year 2022 would be 6-8% ahead of 2021.
Zantac litigation clouds
However, despite good results in July, further news around litigation in the US for one of GSKs legacy products, Zantac, hit the shares of Haleon. Headlines regarding a potential $10 – 40 billion combined lawsuit resulted in significant share price declines for drug makers previously associated with the once popular antacid’s sale. Whilst Haleon investors were made aware of this risk in the company’s prospectus back in July, new analyst reports assessing potential damages has stoked investor worries over litigation.
Whilst Haleon as a new entity has no official ties to the Zantac product, investors should remember the case of Reckitt Benckiser and Indivior, who were both implicated in litigation for unlawful marketing of the anti-opioid treatment Suboxone for a number of years. Thus despite Haleon having no implied connection to the current litigation, investors should be aware of the risk of potential legal blowback. Both GSK and Pfizer have notified Haleon of potential claims of indemnification.
Debt laden to the tune of £10bn
Another tough pill for investors to swallow would take form in Haleon’s huge debt pile that the entity was spun off with from GSK. The newly listed company was loaded with over £10 billion in debt at the time of listing, according to the Haleon prospectus. This amounts to around 4x EBITDA in 2022. Whilst Haleon’s cash flow is likely to be relatively stable, servicing this debt will bring an additional financial burden for the group as interest rates are set to rise, and bringing the group back within its targeted debt range will reduce the ability for the company to return cash to shareholders until 2024.
Another potential issue for prospective investors in Haleon is the shareholder ownership structure, and likelihood of significant selling pressure after the shareholder lockup expires in November. According to the Financial Times both GSK and Pfizer, who own approximately 44% of the equity in Haleon, intend to sell down their stakes over time. With such a quantity of selling pressure, it is unlikely Haleon’s shares can outperform until existing shareholders have relinquished their positions.
In summary, Haleon is certainly a business with potential, evidenced by the appeal to Unilever prior to listing on the market. The company is profitable and looks to grow revenues at mid-single digits – a target the business will hit in 2022. Despite these prospects, the business currently looks un-investable with too much debt on the balance sheet, pending litigation and large selling pressure yet to come in the stock. At a price of 16x earnings, Haleon is valued in line with many other consumer staples peers. Arguably, given the concerns, this stock should be cheaper.