GlaxoSmithKline PLC (LON: GSK) – Focussing on Strategic Collaborations to Drive Future Growth

GlaxoSmithKline PLC is a FTSE 100 listed multinational Healthcare Company, which operates with three global businesses that manufacture and conduct research on products related to pharmaceutical, consumer healthcare and vaccines. The Group was founded in the year 1715, with an apothecary shop in London and today, it has a workforce of over 99,000 people (including around 12,000 workers in the R&D division) across 95 countries. The Group has around 39 new medicines and 15 new vaccines in the pipeline. The Group is a research-based healthcare entity, which invests heavily in research & developments (R&D). GSK had invested around GBP 4.6 billion in R&D in 2019, which helps them to expand their portfolio and grow sales. Geographically, the Group reports financial from predominantly three locations – United States (US), United Kingdom and Rest of World, while the US contributes the largest amount of turnover.

On 29 July 2020, the Company is expected to announce the Q2 FY20 results. From 2016 to 2020, based on exchange rates of 2015, the Group expects sales and adjusted EPS (on CER basis) to grow at low-to-mid single digit and mid-to-high single digit, respectively.


 (Source: Presentation, Company Website)

Key Fundamental Statistics



Industry Outlook Dynamics

As per the recent report from Research and Markets, the market size of the global healthcare industry is expected to reach US$11,908.9 billion by 2022, which was US$8,452 billion in 2018, growing at a compounded annual growth rate 8.9%. In September 2019 (versus year-on-year 2018), the global pharmaceutical sales increased by 6.4% to GBP 801 billion, while North America held a maximum share of 48% in global sales. The rapid growth in the ageing population will increase the need for drug requirement. Moreover, increasing urbanization will lead to greater wealth and requirement for a better healthcare system and equipment. As the world’s population grows (8.5 billion by 2030), with a rising ageing population (the proportion of population above the age 60 is projected to nearly double between 2015 and 2050) and urbanization, the healthcare sector is also likely to get a boost in the growth trajectory.

The healthcare industry holds a strong growth potential, yet it is thriving in a dynamic environment. It is continuously impacted by the geopolitical tensions and uncertain trading system, that gives a toll on business confidence and expansion plans. The relentless culture of mergers & acquisitions (M&A) and partnerships makes the industry competitive. There were several M&A transactions happened in 2019, especially in the domain of speciality care and oncology. Some major transactions were - Bristol-Myers Squibb acquired Celgene and AbbVie took-over Allergan.

Growth Prospects and Risk Assessment

GSK’s strategy is to tap the maximum market opportunities by leveraging the robust R&D capabilities, while mitigating the potential risk of a rapidly changing environment. The Company keeps on launching new platforms and upgrade the old products and services to become one of the market leaders in the healthcare market. The Company has been witnessing a strong demand for existing as well as newly launched products in the market. Over the years, the Group has accelerated growth organically and through acquisitions. There has been a strong demand for existing as well as newly launched products in the market. The Company, through wide-ranging scope, had accelerated growth organically and through acquisitions. The Group has witnessed a transformational change within the Group, which is reflected in the trading performance. The operations of the Group are driven by scientific innovation and brings the next generation of vaccines and medicines for patients, which can transform the entire healthcare sector.

However, there are certain current and emerging risks, which can affect the Group’s performance. The uncertainties regarding Brexit can hamper their development and growth plans. The Company operates in a highly competitive environment and changing the digital landscape can increase the pricing pressure. Due to Covid-19 mayhem, the Group can face supply chain disruption, which might incur additional costs. Also, the priorities of the Group have been shifted due to the pandemic, which has slowed down the recruitment for clinical trials. Any changes in government policy or legislation could impact the market opportunities and operating performance. Global political uncertainty regarding trade policy also poses a risk for the group, including protectionist measures and regulation or legislation in the local markets. 

Segment Analysis

The last five-year turnover performance for the operating and geographic segments can be seen in the image below:

 

(Source: Presentation, Company Website)

Synopsis of Recent Developments – Drug development and disposal of stake

20 July 2020: GSK announced a strategic collaboration agreement with CureVac for development and commercialization of monoclonal antibodies and up to five mRNA-based vaccines. Under the agreement, GSK acquired nearly 10% stake in CureVac for £130 million. The agreement would be a strategic collaboration for R&D, manufacturing, development and commercialisation of mRNA-based vaccines and mAbs (monoclonal antibodies).

15 July 2020: The Company announced that US Food and Drug Administration (FDA) voted in favour of belantamab mafodotin for patients with relapsed/refractory multiple myeloma.

29 June 2020: The Company received the first regulatory approval for Duvroq (daprodustat) tablets in Japan for patients with anaemia due to chronic kidney disease.

7 May 2020: GSK realized the 5.7% stake in HUL for INR 254.8 billion pertinent to the disinvestment of Horlicks originally announced in December 2018.

April 2020: The Group had collaborated with Sanofi and Vir Biotechnology to find the potential solution for Covid-19 and SARS-CoV-2.

Measuring Operating Key Performance Indicators (KPIs)

The performance of operating KPIs over the past three years can be tracked through the picture given below:


 

(Source: Annual Report, Company Website)

Top Shareholders Statistics

Financial Highlights – Improved Financial Performance for Q1 FY2020 (31 March 2020)


(Source: Quarterly Report, Company Website)
 

In the first quarter of FY2020, the revenue increased by 19 per cent to £9,090 million (Q1 FY2019: £7,661 million), driven by an increase in the revenue from Pharmaceuticals, Vaccines and Consumer Healthcare businesses. The Operating profit increased by 41 per cent to £2,014 million in Q1 FY2020 (Q1 FY2019: £1,428 million), reflecting an increase in the revenue for the period. The adjusted operating profit stood at £2,675 million for the period, reflecting an increase of 24 per cent. The Group’s PBT (profit before tax) and PAT (profit after tax) increased by 42 per cent and 70 per cent, respectively, to £1,835 million and £1,679 million, respectively. The total earnings per share surged by 87% on AER (actual exchange rate) and 89% on CER (constant exchange rate) to 31.5 pence for the period, reflecting decent operating performance. The net cash flow from operating activities stood at 965 million, with free cash flow of £531 million for the period. The Group declared a dividend of 19 pence in the first quarter of the financial year 2020. 
 

Financial Ratios: Higher Profitability Margins versus Industry Median

Reported profitability metrics for the first quarter of the financial year 2020 stood higher than the Industry Median, reflecting higher revenue generated and better control over expenses. GlaxoSmithKline Plc has delivered a substantial return for the shareholders’ as Return on equity of 12.8% was higher as compared to the industry median of 3.1%. On the liquidity front, GlaxoSmithKline Plc’s current ratio was lower than the industry median of 1.52, but the Group has sufficient current assets to pay short-term obligations. The Group managed to increase the liquidity as against last year comparatives. On leverage front, the debt-equity ratio of the GlaxoSmithKline Plc’s was 2.44x, which stood higher as compared to the industry median, reflecting that the Company is more leveraged as compared to the industry.  

Share Price Performance Analysis


Daily Chart as on 23 July 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On July 23, 2020, at the time of writing (before the market close, at 10:53 AM GMT+1), GlaxoSmithKline Plc shares were trading at GBX 1,619.00, up by 0.88 per cent against the previous day closing price. Stock 52 week High and Low were GBX 1,857.00 and GBX 1,328.19, respectively.

Bullish Technical Indicator

From the technical standpoint, 14-day RSI is currently in an oversold zone, which means there is a good potential for a short term rebound in the stock price.

Valuation Methodology

Price to Earnings Approach (NTM)



To compare GlaxoSmithKline Plc with peers, Price/Earnings multiple has been used. The peers are AstraZeneca Plc (Price/NTM Earnings was 24.29), Royalty Pharma Plc (Price/NTM Earnings was 17.16), Hikma Pharmaceuticals Plc (Price/NTM Earnings was 16.64), Gilead Sciences Inc (Price/NTM Earnings was 11.18) and Bayer AG (Price/NTM Earnings was 8.20). The Average of Price/Earnings (NTM) of the Company’s peers was 15.49x (approx.).

GlaxoSmithKlinePlc Vs FTSE 100 Index (5 Years)


(Source: Refinitiv, Thomson Reuters)

In the last five years, GlaxoSmithKline Plc share price has delivered 3.52 per cent return as compared to the negative 18.39 per cent return of FTSE 100 index, which shows that the stock has outperformed the index during the last five years.

Business Outlook Scenario

The Company has shown an increase in financial performance in the first quarter of the financial year 2020. Both the top-line and the bottom-line performance accelerated with improved profitability margins. GSK has maintained guidance for adjusted EPS for the financial year 2020, based on internal and external risks. From 2016 to 2020, based on exchange rates of 2015, the Group expects sales and adjusted EPS (on CER basis) to grow at low-to-mid single digit and mid-to-high single digit, respectively.

GSK has several new products under the pipeline, which are classified into three stages: phase I, phase II and phase III. The generic name for some of the phase III pipeline are otilimab, daprodustat, and mepolizumab Nucala, which are focused on HIV, Anaemia associated with chronic renal disease, and COPD, respectively. In 2019, the Group accelerated oncology pipeline with Zejula (registered for ovarian cancer), belantamab mafodotin, and dostarlimab (endometrial cancer).
 
The Group has a wide range of tools and applications to support research related to the Coronavirus and is working in combination with multiple organizations, which can prove to be a gamechanger in the near term. The Company is closely monitoring the supply chain network and responding quickly to fluctuations in demand. The Group is unable to quantify the full impact of Covid-19. Given the industry backdrop, GSK has developed a strong pipeline of opportunity from producing assets and is making an investment in those assets to fetch higher returns in the long-term.

 
 (Source: Presentation, Company Website)
 
Over the course of 3 years (FY16 - FY19), the company’s revenue surged from GBP 27,889 million in FY16 to GBP 33,754 million in FY19. Compounded annual growth rate (CAGR) stood at 6.57 per cent.
 
Based on the decent prospects and support from the valuation as done using the above method, we have given a “Buy” recommendation at the current price of GBX 1,619.00 (as on 23 July 2020, before the market close at 10:53 AM GMT+1) with lower double-digit upside potential based on 15.49x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.
*Dividend Yield may vary as per the stock price movement.

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