GlaxoSmithKline PLC (LON: GSK) – Starts phase 2/3 trials of adjuvanted covid-19 vaccine candidate along with Medicago

GlaxoSmithKline PLC is a global healthcare company that is engaged in the research, development and manufacturing of innovative pharmaceutical medicines, vaccines and consumer healthcare products. The products manufactured by the Company improves the health and well being of people. GSK broadly categorises its business segment under Pharmaceuticals, Vaccines and Consumer Healthcare. The Pharmaceutical business has a portfolio of medicines that are used for respiratory, HIV, immuno-inflammation and oncology. Vaccine division develops vaccines that are used to protect people against infectious disease. Consumer Healthcare business of the Company includes oral health, pain relief, cold, digestive health and nutritional supplements. The Company has close to 99,000 employees across 95 countries. GSK is listed on the FTSE-100 index.

GSK will release its Q4 2020 results on 3 February 2021.

Key Brands under GSK’s Portfolio

(Source: Company website)

Growth Prospects and Risk Assessment

GSK’s success and growth are mainly dependent on its development and innovation in healthcare products. The Company invests in scientific and technical opportunities to develop and launch a pipeline of new products. In Q3 FY20, 40 new medicines and 18 new vaccines were in development.   The priority for growth is to deliver innovative sales with good commercial, R&D and supply chain execution. The Company has multiple vaccines and medicines in the pipeline and development phase, and it is also working on a portfolio of covid-19 solutions. In order to drive growth and follow its strategic priorities, the Company started a two-year programme for separation into two new companies, Biopharma and Consumer Health. Biopharma company will have an R&D approach focussed on science related to the immune system, use of genetics and new technologies. Consumer Healthcare company will have leading brands and innovation based on consumer insights. GSK will optimize its capital allocation with a focus on R&D pipeline, increasing vaccine capacity and launching new products.

The financial performance indicators have shown resilience despite the impact of the pandemic. The revenue CAGR of the Company has grown at around 9% between 2016 and 2020. The sales of new and speciality pharmaceuticals have grown with a strong operating margin at a group level. The Company returns a significant portion of its cash generation through regular dividend payments. The net debt of the Company at the end of Q3 FY20 was lower as compared to the previous year, and it has a substantial liquidity headroom.

(Source: Company website) 

Meanwhile, the rising geopolitical tensions have increased uncertainty, and the trading conditions have taken a toll on consumer’s confidence and investment decision. The Company is engaged in the business of vaccine and medicine development, and thus any failure in meeting the proper quality can put a patient’s life at risk. GSK is also exposed to various regulatory risks and it has various products in the pipeline for government approval. Any failure to get approval for vaccines and healthcare products can put the products under threat.

Industry Outlook Dynamics

The Healthcare industry has a strong growth potential, and it is continuously changing due to increased competition. The market size of the global healthcare market is growing with an increase in new life-threatening diseases and the ageing population. The worldwide pharmaceutical sales stood at £801 billion between September 2018 and 2019. North America is the largest healthcare market with a global share of 48%, and Europe constitutes around 21%. The global healthcare market is expected to be about £140 billion, and global vaccine sales stood at £23.8 billion in 2019. The merger & acquisition deals have become very prominent in the healthcare sector, and significant innovations are taking place. 

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of GlaxoSmithKline Plc.

Recent Developments

On 12 November 2020: GSK and Medicago announced the start of Phase 2/3 clinical trials for COVID-19 vaccine after the positive Phase 1 results.

On 9 November 2020: ViiV Healthcare (owned by GlaxoSmithKline) has revealed interim analysis from HIV Prevention Trials Network (HPTN) 084 study that showed that investigational injectable cabotegravir is superior to oral standard of care for HIV prevention in women.

On 3 November 2020: The Company has set a new environmental objective of a net positive impact on nature and net-zero impact on climate by 2030.

On 28 October 2020: GSK and Sanofi have signed a Statement of Intent with Gavi (legal administrator of the COVAX Facility) and intend to make available 200 million doses of their adjuvanted recombinant protein-based COVID-19 vaccine.

A Glimpse of Business Segments (Q3 FY20)

 Q3 FY20 Trading Update (for the period ended 30 September 2020, as on 28 October 2020)

(Source: Company Website)

• In the nine months for FY20, the turnover increased by 2% year-on-year (CER basis: up 4%), reflecting strong performance from Consumer Healthcare, oncology, respiratory and HIV. However, the turnover was down 3% (CER basis), due to disruption caused by Covid-19.
• Total operating profit increased by 33% (37% on CER basis) year-on-year in 9M FY20, reflecting the resultant sale of shares in Hindustan Unilever, increased income from asset disposals, and the profit on disposal of the Horlicks and other Consumer Healthcare brands.
• Further, the adjusted operating profit in 9M FY20 was flat compared with 2019, but it has shown an increase of 3% at CER. The pro-forma adjusted operating margin stood at 28.0% in 9M FY20.
• However, the total operating profit was down by 2% at CER in Q3 FY20, due to higher re-measurement charges and an adverse comparison in value of shares in Hindustan Unilever Limited. Moreover, adjusted operating profit was 4% lower than Q3 2019 at AER.
• The net cash from operating activities increased significantly in Q3 and 9M period for FY20.
• Excluding established products, the sales of new and specialty pharmaceuticals stood at £2.5 billion, 12% higher at CER and 8% higher at AER.
• Adjusted EPS was 35.6 pence, 1% higher at CER, reflecting operating profit growth, partly offset by the higher effective tax rate and non-controlling interest allocation of Consumer Healthcare profits.
• The Board has declared a third interim dividend per share of 19 pence.
• The Company continues to make progress in biopharma pipeline and won three approvals in the third quarter.
• GSK and Sanofi have signed agreements with Canada, the United States, European Union, and the United Kingdom for Covid-19 vaccines.
• Glaxo maintained the guidance of annual adjusted earnings per share falling between 1% to 4% at constant currency.
• The Company is committed to make the investments in new products and for R&D pipeline to support long-term growth.
• The Company is also advancing possible Covid-19 Solutions with the partners, with three different adjuvanted vaccines and clinical trials for antibody therapy VIR-7831.
• Overall, the Company has shown improvement in financial performance for nine months for FY20, while maintaining good momentum on the strategic priorities, and the fundamentals of GSK’s business stayed strong.

Share Price Performance Analysis

(Source: Refinitiv, chart created by Kalkine Group)

On 26 November 2020, at the time of writing (before the market close, at 8:02 AM GMT), GlaxoSmithKline shares were trading at GBX 1,383.40, up by 0.35% against the previous day closing price. Stock 52-week High was GBX 1,857.00 and Low of GBX 1,284.00, respectively. From the technical standpoint, 14-day RSI stood at around 42, which is supporting the upside movement.

In the last five years, GlaxoSmithKline Plc share price has delivered around 4% return as compared to the approximately 0.84% return of FTSE 100 index, which shows that the stock has outperformed the index during the last five years.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook Scenario

The Company has delivered a resilient performance in the recent quarters, and it has built a strong momentum on strategic priorities and covid-19 response. The pandemic has impacted the Vaccines business segment of the Company; however, the vaccination rates have improved slightly recently. The Company has set in cost control methods, and growth drivers have offset the impact of the pandemic. The health crisis has led to a significant increase in consumer healthcare products. The Company has a strong pipeline of product development. The phase III trial of RSV vaccines is expected to start in Q4 2020 and Q1 FY2021. GSK highlighted that it expects the adjusted earnings per share to decline in the range of 1% to 4% on a constant exchange rate in FY20. The performance of the Pharmaceutical and Consumer business is on track, and a sustained recovery in the adult vaccination rate is expected. The key focus would also be delivering integration and restructuring programmes. The R&D costs in 2020 are expected to increase by mid-to-high single digits due to investments in the last-stage pipeline.    

(Source: Company website)

Considering the resilient performance, strong momentum on strategic priorities, sustained recovery in adult vaccination rates, sound business model, decent operating and financial performance, robust cash generation, improved profitability margins, won three approvals in Q3 FY20, consistent dividend payments from the last 15 years, and support from the valuation as done using the above method, we have given a “BUY” recommendation on GlaxoSmithKline at the current price of GBX 1,383.40 (as on 26 November 2020, before the market close at 8:02 AM GMT), with lower-double digit upside potential based on 14.89x 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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