UK Edition
Our patience since this column’s tip in April 2021 may finally be getting some reward at GSK, formerly GlaxoSmithKline. Revenues, profits and dividend forecasts continue to move up and the shares sit near a one year-high, further boosted by a litigation settlement in California.
While the FTSE 100 drugs maker is by no means fully clear of lawsuits relating to the heartburn treatment Zantac, this is the third legal dismissal or settlement in quick succession and, so far, the market’s worst fears regarding possible liabilities have yet to be borne out.
If the legal cloud lifts once and for all, the shares could make further advances, especially as momentum in the underlying business appears to be building nicely.
Zantac is the subject of lawsuits that claim it causes cancer. Last December a Florida judge dismissed thousands of lawsuits on the basis that the science behind the claims was weak.
Canada’s Supreme Court rejected a class action suit in May. Now GSK has settled four cases in California, including three related to breast cancer and one that was due to start on Nov 13. GSK has not admitted liability and has said it will continue to defend itself.
Combined, these steps are helping the share price to recoup the ground lost last summer when the lawsuits alleging a link between Zantac and cancer were launched. GSK’s market value dropped by more than £15bn in the next couple of months. That may well have priced in a very negative outcome, one that has yet to come to pass – and may not do so, judging by the latest legal developments.
It would be wise not to get too carried away too soon, as GSK still faces a long list of state and federal cases and the shares are likely to remain volatile as a result. But the stock could just be cheap, with a lot of bad (legal) news seemingly priced in and the actual day-to-day business performing strongly.
Chief executive Emma Walmsley upgraded 2023’s guidance for sales and profits for the first time alongside July’s second-quarter results, and that followed two upgrades last year.
The board now expects GSK to generate sales growth of between 8pc and 10pc and adjusted operating profit and earnings per share growth in the range of 11pc to 13pc and 14pc to 17pc respectively. On each occasion GSK nudged up growth estimates by a couple of percentage points.
This reflects the impact of complementary acquisitions and GSK’s own drug development efforts.
In the second quarter of this year, products developed since 2017, including asthma medicine Trelegy, shingles treatment Shingrix and immuno-oncology drug Jemperli, generated two thirds of group sales.
GSK’s aim is to double sales of Shingrix to £4bn by 2026 and last week’s exclusive strategic agreement with China’s largest vaccine firm, Chongqing Zhifei Biological Products, to co-promote the product is a big step in that direction.
GSK is also very hopeful that this partnership will eventually boost sales of the respiratory syncytial virus vaccine Arexvy once it receives clearance for sale in China.
This product has received regulatory clearance in the US, EU and Japan and such approvals and commercial agreements underline the importance of GSK’s work to develop its pipeline.
At the end of the second quarter GSK had 68 drugs in phase I, II or III trials across its core target markets of infectious diseases, HIV, oncology and respiratory and immunology products.
GSK’s disposal earlier this month of shares in Haleon, the consumer products business spun off last year, will help to bolster the balance sheet and reaffirm the company’s pure-play status. GSK still owns 7.4pc of Haleon.
Yet GSK trades at barely 11 times forecast earnings, with a dividend yield near 4pc. The earnings multiple represents a clear discount to rivals such as AstraZeneca, Switzerland’s Roche, tipped yesterday in this column’s online version, and America’s Bristol-Myers Squibb, which trade on 30, 15 and 14 times earnings respectively.
The shares would also look cheap were GSK to meet its own long-term growth targets, reaffirmed alongside the interim results. It is committed to generating compound trend sales growth of more than 5pc a year and compound adjusted operating profit growth of more than 10pc a year, as profit margins expand from the 30pc recorded in the first six months of 2023.
GSK could look cheap as and when the legal clouds lift.
Questor says: hold
Ticker: GSK
Share price at close: £14.93
Russ Mould is investment director at AJ Bell, the stockbroker
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