GSK has yet to convince the market that it can avoid slipping off the patent cliff. Britain’s second biggest pharmaceuticals group is suspected of not investing enough in new treatments.
A strong debut from Arexvy, its breakthrough respiratory vaccine, might help to dispel the notion that the group is not doing enough to refill the hopper. The vaccine was launched in the United States in May and has been rolled out to 1.4 million adults above the age of 60.
Sales of £709 million for the new vaccine in the third quarter were ahead of expectations and provided a reason for another upgrade to group organic sales guidance. It expects sales growth of 12 per cent to 13 per cent this year, ex-Covid treatments, up from 8 per cent to 10 per cent previously, the second time that the outlook has been raised.
There are 83 million eligible adults for the vaccine in the US alone. The treatment has shown signs, too, of efficacy in those aged 50 to 60 with severe illness, a cohort that numbers about 40 million in America. Japan and Britain also have approved it. Sales for Arexvy could reach £3 billion a year at the peak, GSK says.
That would go some way towards offsetting any continued slowdown in sales of Shingrix, its shingles jab. In the second quarter, GSK downgraded guidance for sales growth for the vaccine. That has raised suspicions that the treatment could be reaching a saturation point in the American market, where it has a 30 per cent share. Demand is still solid enough, though: sales were up 15 per cent in the third quarter at £800 million and stand at £2.5 billion so far this year. GSK thinks a peak of about £4 billion will not come until 2026. Making inroads into other markets could help to prolong sales, including a co-promotion partnership in China with Zhifei, domestic biotechnology company.
Unlike Shingrix, demand for Arexvy will be seasonal. Sales this year are set to hit between £900 million and £1 billion, which means that the bulk has been banked in the third quarter. But analysts at Shore Capital point out that even if pharmacies are stockpiling the vaccine, it is a strong sign that demand is expected to follow.
GSK’s shares lag those of AstraZeneca and trade at just over nine times forward earnings, compared with fifteen for Astra. It is valued at a discount to Merck and Pfizer, too. In that context, GSK’s capital allocation strategy makes sense. The priority is investing in the development of new treatments and making bolt-on acquisitions. Then it will pay out between 40 per cent and 60 per cent of earnings. This year’s dividend is forecast to total 57.2p a share, which would equate to a yield of 3.7 per cent at the present share price.
The group has 17 drugs in late-stage trials or the registration phase. Investment in research and development has risen by 40 per cent since 2017, when Dame Emma Walmsley took the top job.
Meeting its capital commitments shouldn’t be an issue. So far this year it has generated £1.3 billion in free cashflow, after capital expenditure and dividends. The demerger of Haleon, its consumer health business, helped its balance sheet. It also has a stake of just over 7 per cent in its fellow FTSE 100 constituent, which it is in the process of reducing.
Legal battles in the US over claims that Zantac, its old heartburn drug, causes cancer hang over the stock. GSK faces thousands of cases and, analysts at Shore Capital believe, potential liabilities of up to $30 billion. It denies the claims and continues to defend itself. Some cases have been settled. If more follow, attention should return to a sounder strategy under Walmsley.
ADVICE Buy
WHY The shares look too cheap given the progress on capital allocation
Asos
Investors are as tired of Asos as the average 16 to 34-year-old targeted by the fast-fashion group. A warning that sales would continue to decline this year wiped another tenth off the former stock market darling’s valuation.
Asos’s fall from grace has been remarkable. An enterprise value of only six times forward earnings is about a third of the pandemic peak. Vague guidance for “positive” cash generation and adjusted earnings, at least before interest, taxes and other deductions, indicates why that low price tag shouldn’t be interpreted as a value opportunity.
The group is working its way through a mountain of excess stock, which has been reduced by 84 per cent from the 2022 financial year. José Antonio Ramos Calamonte, its boss, has said that the stock “cleansing” should be completed by the end of this financial year.
The problem is that there is no guide on just how much that will cost. Discounting old stock sent the group to a pre-tax loss of nearly £300 million last year. This year it will contribute towards a 5 per cent to 15 per cent fall in sales, worse than a consensus expectation that sales would stabilise, helped by weak comparatives.
The beleaguered retailer is hoping for positive free cashflow this year, as more muted discounting helps to offset the £130 million it plans to spend on improving its technology and completing the automation of two distribution facilities. In hindsight, that looks like cash poorly spent — one of those facilities will be mothballed to make capacity better fit demand.
Can it generate free cashflow this year? A £45 million charge will be taken for shuttering the Lichfield facility this year. Added to capex, there is not too much difference from last year’s £185 million capital spending. It will be without some drains such as refinancing fees, but it also banked £78 million from raising equity and another £200 million from its said refinancing.
A lot, including whether it can actually return to growth in 2025, will depend on whether attempts to bring products to market faster and to lure back shoppers will translate to genuine sales growth. Or have customers simply moved on?
ADVICE Avoid
WHY The chance of Asos missing guidance seems high
