GSK (LON:) has delivered a steady performance within a rapidly changing environment, as technology and policy provide both consistent opportunities and threats.
The industry is one which is notoriously difficult to navigate. Drug development is a time-consuming, costly and risky endeavour, while there is also increasing evidence of litigation for the unintended side-effects of new products. After products have reached peak earnings, revenues are then susceptible to patent expiries, whereby the drugs become generic at much lower prices.
Given that GSK has 52% of its sales in the US, changes in pricing rules from the White House have inevitably had an impact. Investor sentiment has been affected by rapidly changing policy, as evidenced in many other areas from this administration, which threatens the ability to plan as well as immediate revenues. During the year, a 100% tariff on imported medicines was such an example, although the fact that GSK has substantial investment in the US will be a largely mitigating factor. Even so, price cuts such as to those drugs covered by Medicaid could be an ongoing headwind.
More promisingly, GSK’s Research and Development efforts are continuing apace, with the current tally of more than 50 products in the pipeline a promising sign of things to come. Many of these are in Phase III, or late stage which is the final regulatory hurdle before the products get the full green light and the group expects at least two major products to gain approval over the next year.
The group is one which has historically made selective acquisitions which heighten its expertise and focus over the suite of its products and the new CEO has already had the opportunity to make his mark with the agreed acquisition of US biotech company RAPT Therapeutics for £1.6 billion ($2.2 billion) in January of this year, opening up an exposure to the 17 million people suffering from food allergies.
GSK is far from being a one-trick pony, as evidenced by the performance of its Speciality Medicines unit where recues grew by 17%. Other strings to its financial bow came from 18% sales growth in Respiratory, Immunology & Inflammation, 43% in Oncology and 11% in HIV products. As such, overall revenues grew by 7% to £32.7 billion, slightly ahead of expectations, with core operating profit growth of 11% to £9.78 billion, which was in line.
Immense cash generation of £8.9 billion and free cash flow of £4 billion showcased the group’s financial strength. A share buyback programme of £2 billion is ongoing, while the marginal increase to the dividend takes the projected yield to 3.4%, rewarding shareholders in addition to the simple share price return.
Meanwhile, the group’s outlook is upbeat, with expected growth of between 3% and 5% next year in sales, and of between 7% and 9% in core operating profit. At the same time, GSK reiterated its 2031 target for sales to exceed £40 billion, which looks increasingly achievable despite being initially viewed as extremely stretching.
There is little doubt that the sector is an exciting space, not only in terms of the leaps being made by technology but also by the major financial rewards which the larger players are chasing. The rapid evolution of AI, for example, is decreasing both discovery and development time to market and GSK is firmly in the mix with the shares having risen by 39% over the last year, as compared to a gain of 20.3% for the wider .
Even so, the market consensus of the shares as a hold reflects the ascending star of AstraZeneca (LON:) which, in addition to its heightened awareness within the US after initiating its dual listing there this week, remains the preferred play in this burgeoning sector.