GSK Trades At Low Price Multiples, But Its Pipeline Needs To Improve (OTCMKTS:GLAXF)

Thesis

GSK plc (NYSE:GSK) trades at low price multiples relative to competitors. At the surface, it looks like a good buy. However, in my opinion, the lower multiples reflect weaker later stage pipeline relative to competitors. Current pipeline will not face significant patent expirations over the next couple of years, but GSK needs to prove that its pipeline can successfully compete in a very competitive market. Given the relatively low price multiples and that GSK needs to improve its pipeline, GSK is a hold.

Introduction and Performance

GSK is a global pharmaceutical company headquartered in the United Kingdom. GSK is one of the leading vaccine makers worldwide and a major player in the development, manufacturing and marketing of prescription medicines across multiple areas. The company operates in more than 75 countries and spends a significant amount of money on research and development ((R&D)). Over the last three years, the total R&D spend was £16.7bn whist last year was the largest amount of the three years at £6.2bn.

The 2023 full year results showed that the company had a modest growth across its fundamentals. Revenue increased by 5%, operating profit by 10% and continuing earnings per share by 16% on a constant exchange rate as shown below. The relatively higher earnings per share growth was driven by lower charges related to the remeasurement of contingent liabilities and was partly offset by the fair value loss of the retained stake in Haleon plc (HLN). HLN is the spin-off of the consumer healthcare business from GSK and PFE that was completed back in the summer of 2022.

GSK managed to maintain its market leadership position on vaccines’ revenue between 2017 and projected for 2024 it is one of the few big players that will manage to not lose market share. GSK had a market share of 24% back in 2017 and is projected to have a market share of 24.1% for 2024. In contrast, Merck & Co (MRK), Sanofi (SNY) and Pfizer (PFE) all have a projected lower market share based on vaccines’ revenue for 2024.

Lastly GSK’s total return performance has been average when compared with MRK, SNY and PFE over the last 10 years as we can see below.

The Pipeline

GSK has demonstrated in the recent quarters and year that some of their products exceeded expectations and are performing relatively strong. The company’s revenue is equally split between its categories of vaccines, specialty medicines and general medicine with £9.9bn, £10.2bn and £10.2bn in revenue for 2023. The current pipeline is not expected to suffer from patent expirations over the next two years.

Some strong vaccine performers are Shingrix, Bexero and Arexvy. Shingrix had a 17% CER growth, meningitis vaccines grew on a CER by 13% primarily driven by Bexero and Arexvy launch was a success hitting sales of £1.2bn which came only from the United States. Specialty medicines also have strong performers, including Dovado and Cabenuva both HIV treatments and parts of oncology medicines which are growing rapidly but are a relatively smaller contributor to revenue.

In addition, I do not see an immediate thread from expirations. For example, £1bn+ revenue GSK products that expire over the next two years are two. Hence, in my opinion, the current pipeline is sustainable and not under significant risk over the coming years.

It is also important to look at possible new products that will come to the market. Below we look at each of GSK, PFE, SNY and MRK products that are in phase three or in registration phase to understand the new products that are coming to the market for these companies. It is important to note that these are not definitive will be entering the market but have a higher likelihood as they move up in phases.

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As we can see above, GSK has a much smaller phase three/registration pipeline than competitors.

Relative Valuation and Dividend

GSK trades at a low forward price to earnings non-GAAP per share multiple of 10.4x as of today. As we can see below, the price to earnings and enterprise value to earnings before interest and tax multiples have been declining over the last 5 years. More specifically, price to earnings declined by 11% and enterprise value to earnings before interest and tax multiple declined by 26%.

In addition, when we compare GSK’s price multiples and dividend yield with its competitors, it is clear that GSK trades at lower price multiples and offers a dividend yield that is in the middle of the range.

Based on the forward price multiples of P/E GAAP, EV/EBIT and P/Cash Flow, GSK is on average relatively undervalued by 11%, 29% and 19%.

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In addition, the dividend at the current level is safe. As we can see from the charts below the payout ratio is at a healthy rate of 45% and if the business continues to incrementally improve its fundamentals, the dividend should remain safe and grow over time.

Overall, GSK is relatively undervalued. The undervaluation, I believe, is justifiable for two reasons. Firstly, as discussed above, the phase three/registration assets are much lower when compared to competitors. As more of the pipeline moves through the phases and to registration and if GSK catches up to competitors, then the multiple gap should close. In addition, R&D expenditure for GSK for 2023 was 20.5% of total revenue. This is much lower than MRK which trades at a higher multiple. MRK spend 50.7% of its revenue on R&D for 2023. PFE and SNY spent 18.3% and 15.5% of their total revenue but have more products at later stages in their pipeline, which in my opinion, leads to higher price multiples.

Risks

In my opinion, GSK faces two main risks. Firstly, the pipeline is key to its success. This is not unique to GSK as all pharmaceutical companies need to have a strong pipeline to remain competitive and achieve growth. However, as discussed above, GSK phase three or registration products are much lower than competitors. Hence, GSK needs to demonstrate that the pipeline they are developing is able to achieve a higher percentage of success to close the gap with competitors. As I mentioned above, the launch of Arexvy provides evidence that they can develop and sell strong products, however, this needs to be on a continuous basis to achieve growth and be successful in a competitive market. Any issues with the pipeline such as unsuccessful R&D or failing to protect intellectual property is a significant risk for GSK as its pipeline can further deteriorate relative to competitors. Following the HLN spin-off GSK’s management argued that they will become a more focused company. In our opinion, more focused should lead to better pipeline and more efficient R&D which is something we have not seen yet.

The second risk is the risk of litigation. GSK has recently agreed to settle another Zantac litigation. However, litigations will not stop here. Zantac litigations are not over and litigations are a constant risk for the pharmaceutical companies and can result in high costs for GSK. When GSK violated the false claim act back in 2012, they ended up paying a total of $3bn. As a result, investors need to keep in mind that large one off costs can arise as a result of litigations.

Lastly, as GSK is expected to announce Q1 2024 earnings on the 1st of May 2024 they should pay close attention to how the fundamentals and pipeline are performing. As per above, following the HLN spin-off management has also committed to sales growing by more than 7% and adjusted operating profit growing by more than 11% on a compound basis from 2021 to 2026. Shareholders should be assessing management against their goals to evaluate if they are meeting their goals.

Conclusion

GSK had modest growth in 2023 and has some strong performers in its product mix. The current pipeline is not significantly impacted by any expirations over the next two years. GSK trades at relatively lower price multiples than competitors, but in our opinion, GSK has to demonstrate that their pipeline is more effective and efficient to catch up to competitors. In our opinion, GSK is a hold at this level.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.