No quick fix for Glaxo’s Walmsley despite results boost

Our equities expert ponders the path forward for one of the world’s pharmaceutical giants.

28th July 2021 16:35

Our equities expert ponders the path forward for one of the world’s pharmaceutical giants.

There's clearly no quick fix for the GlaxoSmithKline (LSE:GSK) share price despite chief executive Emma Walmsley's big strategy overhaul and today's moderately better-than-expected half-year results.

The FTSE 100 index stock spent the first part of July above 1,400p but is back below the threshold a month after Walmsley’s review, when she promised a step-change in sales, operating profits growth and performance from 2022.

Her focus is on high quality vaccines and the specialty medicines portfolio, but for now there's continued frustration for investors — including customers who made Glaxo the third most popular stock on the ii platform — as shares fell back 9p to 1,390p today.

The decline came as Glaxo revealed that the recovery of its best-selling shingles jab Shingrix was taking longer than expected outside the United States, having been impacted by health centres prioritising Covid-19 vaccination programmes.

This means revenues for the vaccine division are expected to be flat across 2021, despite strong underlying demand for other products, which include protection against childhood diseases such as measles, meningitis and pneumonia.

Revenues from the use of Glaxo's adjuvant technology on several Covid-19 vaccines boosted the division in the second quarter, but overall the figure across the first half of the year was flat at £2.8 billion and 9% lower when excluding the pandemic vaccines.

Pharmaceuticals turnover of £8.1 billion for the first half was up 2% at constant exchange rates, led by growth from respiratory and HIV products and partly offset by declines in more established drugs as demand has also been affected by Covid-19.

Turnover across the group, including the consumer healthcare arm, came in at £15.5 billion for a fall of 1% on an underlying basis. The figure was 15% higher at £8.1 billion in the second quarter, helping adjusted earnings per share (EPS) to rise 71% to 28.1p.

The company still expects to see an EPS decline across the year in the mid to high single digits, excluding any contribution from Covid-19 products.

Walmsley is looking for “meaningful improvements” in revenues and margins starting next year, alongside the separation of the consumer healthcare arm in a long-awaited demerger.

Walmsley's medium-term targets in a strategy update last month included sales growth of more than 5% and an operating margin of over 30%.

The Glaxo divi, which is one of the most prized in the FTSE 100 index, is also being reset so the company can step up investment around vaccines and its speciality medicines in oncology, HIV and hard-to-treat diseases.

The dividend has been at 80p a share since 2014 for a current yield of 5.7%, with Walmsley today confirming the latest 19p a share quarterly instalment will be paid on 7 October.

The pay-out is being cut to about 55p next year for what should still equate to a yield of about 3.9%.

The remaining “New GSK” business is then expected to adopt a progressive dividend policy targeting a pay-out ratio equivalent to about 40%-60% of earnings, starting with 45p a share in 2023.

Glaxo is demerging 80% of its majority stake in the Sensodyne and Panadol consumer joint venture to Glaxo shareholders, with the new shares set for a premium listing in London.

The separation of a business that generated annual sales of more than £10 billion last year should take place by the middle of next year and lead to an £8 billion windfall payment to New GSK. The narrower focus will enable New GSK to further enhance an existing pipeline of 20 vaccines and 42 medicines, many of which it says are potential best or first in class opportunities.

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