Interactive Investor

GSK exceeds expectations but Zantac overhang remains

26th April 2023 13:38

Graeme Evans from interactive investor

Covid sales might be declining, but the drug giant is doing better than the City expected. However, lawsuits over cancer risks around its popular heartburn drug are keeping investors away.

Frustration for GSK (LSE:GSK) investors continued today after results showing a stronger-than-expected start to 2023 failed to spark the drug giant’s lacklustre share price.

The shares dropped 8.1p to 1,492p, keeping them within the 1,300-1,500p range that’s largely been GSK’s home since August’s disclosure of US litigation on heartburn drug Zantac.

The company continues to defend itself vigorously against all the claims, but doing so will take time given that two cases on Zantac have been set for trial in Illinois in 2024.

In the meantime, the company has reported strong momentum as first-quarter turnover of £6.95 billion beat the City’s consensus by 7% and operating profit of £2.1 billion by 9%. A dividend of 14p a share worth £567 million in total is due to be paid on 13 July, in line with unchanged guidance for shareholders to receive 56.5p for 2023.

Key growth drivers in today’s results included Shingrix for shingles, as well as the company’s meningitis vaccines, long-acting HIV medicines, Benlysta in immunology and Nucala and Trelegy in respiratory. Together these products contributed more than 40% of sales.

Despite today’s beat, there’s no change to the company’s full-year guidance at constant exchange rates. This points to growth rates excluding Covid-19 of 6-8% for turnover, an adjusted profit rise of 10-12% and earnings per share (EPS) between 12% and 15%. 

GSK said: “Despite the recovery of healthcare systems, uncertain economic conditions prevail across many markets in which GSK operates and we continue to expect to see variability in performance between quarters.”

Today’s first-quarter EPS figure of 37p was 11% above the City’s consensus but analysts at UBS said moving parts in terms of inventory changes, pricing benefits, rebate adjustments and phasing made it hard to work out the underlying performance.

They added: “No change to guidance suggests much of the higher Q1 momentum will normalise in Q2 and beyond.”

UBS continues to have a “sell” recommendation and 1,300p price target, a valuation that does not factor in the Zantac litigation. 

The legal issue has overshadowed the company’s attempts to convince the City of its standalone potential since splitting off consumer healthcare operation Haleon (LSE:HLN) in July. 

The shares were above 1,700p at the end of July, only to reverse to 1,300p by September. The slow pace of recovery contrasts with AstraZeneca (LSE:AZN), which has accelerated from 9,600p in October to more than 12,000p ahead of tomorrow’s trading update. 

GSK’s pipeline currently features 68 vaccines and specialty medicines, with 17 in the later stages of development and four anticipated for approval in 2023.

One of the most significant is the respiratory syncytial virus (RSV) vaccine candidate for people over 60. RSV, which exacerbates underlying conditions and can lead to pneumonia, remains one of the major infectious diseases without a vaccine despite 60 years of research. 

GSK believes the RSV market could be worth £5 billion but it faces stiff competition to be first as several biopharma companies are also in the race.

Other positive developments in the GSK pipeline include an antibiotic for urinary tract infections, which was recently the subject of positive data readouts. It also unveiled the acquisition of BELLUS Health Inc (TSE:BLU), a US specialist in the treatment of refractory chronic cough. 

Chief executive Emma Walmsley said: “We are very focused on our upcoming launches, including our potential RSV older adult vaccine, and on continuing to strengthen our pipeline – both organically with several positive late-stage read-outs already this year, and through targeted business development.

“This continued momentum is also supporting our confidence in delivering our medium and long-term growth ambitions.”

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