Company Overview: GlaxoSmithKline PLC (NYSE: GSK) is a science-led global healthcare company, with three core businesses, namely (1) Pharmaceuticals, (2) Vaccines and (3) Consumer Healthcare. Headquartered in Brentford, UK, the company’s pipeline is primarily focused on oncology, immuno-inflammation, HIV, and respiratory therapeutic areas. Notably, the company stands second in the pharmaceutical industry for Dow Jones Sustainability Index.

GSK Details

Key Takeaways from Q2FY21 Results: During the quarter, the company’s earnings and revenues increased on a year over year basis, on the back of robust recovery across all segments. Further, the company’s new products in the Respiratory and Oncology segment and two-drug HIV regimens persisted in performing well in 2QFY1.

• Robust Top-line and Bottom-line Growth: In 2QFY21, the company’s revenues increased ~6% year over year, on a reported basis. At a constant exchange rate (“CER”), the top-line went up by ~15% and came in at ~$11.3 billion (£8.09 billion). During the quarter, adjusted earnings per share went up ~46% year over year on a reported basis and 71% at a constant exchange rate.
• Rise in Pharmaceuticals Segment: At CER, pharmaceuticals sales increased ~12% year over year, owing to higher sales of new and speciality drugs. Sales in the United States, European and International markets went up 23%, 6% and 3%, respectively, at CER. Respiratory sales were also up 36% at CER on pcp basis, mainly on the back of elevated sales from Nucala, and Trelegy.
• Higher Sales from HIV & Dolutegravir Franchise: In 2QFY21, HIV sales increased 14% at CER on a year over year basis, due to destocking in the year-ago quarter. The company witnessed a 14% increase from the sale of dolutegravir franchise at CER during the period.
• Increase in Sales from Consumer Healthcare: The company witnessed a rise of 3% at CER, on pcp from Consumer Healthcare segment. Notably, in August 2019, GSK had formed a new joint venture (“JV”) with Pfizer to build the world’s largest Consumer Healthcare business.
• Sales Recovery in Vaccine Segment: In 2QFY21, sales from the Vaccines segment witnessed a growth of 49% year over year, at CER, owing to meningitis vaccine and pandemic adjuvant sales. During the quarter, GSK recorded sales of £260 million and £258 million from its pandemic vaccines and pandemic adjuvant sales, respectively.
• Rise in Expenditures: In 2QFY21, adjusted selling, general and administration (SG&A) expenses increased 5% at CER, due to the launch of new products in the Pharmaceuticals and Vaccines segments. R&D cost also rose by 6% at CER, depicting higher clinical activity in the Specialty portfolio.

The below picture depicts decent momentum in GSK’s top-line.

Revenue Highlight; Analysis by Kalkine Group

Key Developments:

• Approval from FDA: On 29 July 2021, the company received US Food and Drug Administration (FDA) approval for Nucala (mepolizumab) for treating adult patients (18 years of age and older) with insufficient response to nasal corticosteroids. Nucala is a monoclonal antibody, that is used for curing patients with persistent rhinosinusitis.
• Joint Procurement Deal: On July 28, 2021, to deliver ~220,000 doses of sotrovimab, GSK and Vir Biotechnology, Inc. inked a Joint Procurement deal with the European Commission. sotrovimab is an investigational single dose SARS-CoV-2 monoclonal antibody, used for the medication of adults and youngsters with the COVID-19 virus.
• Strategic Collaboration: On July 2, 2021, the company stated that it has entered into a global strategic collaboration with Alector to jointly develop and co-commercialize the two potential first-in-class monoclonal antibodies (AL001 and AL101), for neurodegenerative diseases.

Balance Sheet & Liquidity Position:

• Cash and debt Position Balance: The company exited 2QFY21 with a cash balance amounting to £3,503 million. The company’s long-term borrowing at the end of the period stood at £20,442 million. 
• Cashflow from Operations: During the quarter, net cash flow from operations stood at £1.3 billion, whereas free cash flow came in at £316 million. 

Key Metrics: In 2QFY21, the net margin of the company stood at 19%, higher than the industry median figure of 17.2%.  ROE for 2QFY21 stood at 9.2%, as compared to 5.5% of industry median.

Profitability Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 7.89% of the total shareholdings, while the top 4 constitutes the maximum holding. Dodge & Cox and Capital International Investors are holding a maximum stake in the company at 3.5% and 0.79%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis:

• COVID-19 Led Uncertainties: The company is exposed to risks associated with general global economic and market conditions, which may cause a delay in shipping products or the launch of new products.
• Stiff Competition: GSK operates in a highly competitive environment, subject to business consolidations, new strategic alliances, market pressures, and regulatory and legislative pressures.  
• Forex Headwinds: Any adverse movement in foreign exchange price may impact the financial performance of the company.
• Leveraged Balance Sheet: At 30 June 2021, net debt stood at £21.9 billion, up from £20.8 billion at 31 December 2020, due to the £2.1 billion dividends paid to shareholders and additional investments of £0.1 billion. An increase in debt indicates a higher risk of insolvency in difficult times.

Outlook: For FY21, GSK expects sales for the pharmaceutical segment to remain flat or expand upto low single-digit (in percentage terms). Revenues from the Consumer Healthcare segment is likely to rise by low to mid-single digits. Further, for 2HFY21, the company anticipates recovery from the sales of the vaccine segment. Despite COVID-19 led uncertainties, the company remains on track to witness decent sales growth from its lupus drug, Benlysta. This momentum is expected to continue in years to come. Also, regulatory approvals for GSK’s essential drugs from FDA is likely to bring additional revenues.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative) 

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: The stock of the company has been corrected by ~1.79% in the past one year. Currently, the stock has a 52-week’s high and low level of $42.40 and $33.26, respectively. We have valued the stock using the P/E multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). We believe that the company might trade at a slight discount as compared to its peer average, considering its supply chain disruption risk, increased costs and expenditure, foreign currency risk, high debt burden, and strict regulatory approval, etc. For that purpose, we have considered peers such as Merck & Co Inc (NYSE: MRK), AstraZeneca PLC (NASDAQ: AZN), to name a few. Considering recovery from the sales of the vaccine segment, a rise in the top-line and bottom-line in 2QFY21, FDA approvals, and valuation, we recommend a “Buy” rating on the stock at the closing price of $40.50, down by ~0.34% as on 4 August 2021.

GSK Daily Technical Chart, Data Source: REFINITIV 

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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