The onset of the coronavirus pandemic has concentrated minds in the healthcare and pharmaceuticals sector, where the race is on to develop quick and accurate tests and, all importantly, a vaccine. This, in turn, has turned the spotlight on to the world’s four big vaccine developers: Merck and Pfizer, of the United States, Sanofi, in France, and the London-listed Glaxosmithkline. Between them, they account for about 85 per cent of a worldwide vaccines market worth $35 billion, according to analysts at Bernstein.
Glaxo is the biggest of them all, based on the percentage of its revenues, at 21 per cent, that come from such treatments — and it might be tempting to conclude that Glaxo’s vaccines business is looking a little more valuable from an investment perspective right now (it was rapidly growing even before the group began to undertake its initiatives relating to Covid-19). However, healthcare groups have made clear that they do not see finding a vaccine for the virus as a profit-making opportunity.
In fact, this has become one of those rare, if striking, examples of companies in a fiercely competitive sector coming together to form partnerships and to work with governments, as well as, in this case, funding procedures being developed by some of the world’s smaller players.
Glaxosmithkline traces its history back to 1715 and an apothecary in London, but it was created in its present form in 2000 with the merger of Glaxo Wellcome and Smithkline Beecham. It operates in more than 150 countries, employs over 100,000 people and its annual sales last year were just under £35.8 billion. The group is divided into three businesses: the biggest by turnover is pharmaceuticals, followed by consumer healthcare and vaccines. Finding successful vaccine treatments is by far the most profitable.
Glaxo is planning to split itself into two. After a deal two years ago with Pfizer, it will create one consumer healthcare business, with brands including Nicorette, Panadol and Sensodyne, and one biopharmaceuticals company, concentrating on immunology and genetics, with a heavy emphasis on research and development to bring new drugs to the market. As things stand, Covid-19 hasn’t interrupted this process, which will take about two years to complete and, although expensive, will considerably reduce the indebtedness of the pharma company. Much of the borrowings, which have concerned analysts previously, will be transferred to the far more cash-generative consumer business.
Nor has it forced Glaxo to cut or defer its dividend. In February it declared a final payment of 23p, making for an annual dividend of 80p a share, which it plans to repeat this year.
The group has made several forays into coronavirus vaccines. As well as a technology-based collaboration with Cepi, a vaccines partnership, Glaxo is working with Clover Pharmaceuticals, a Chinese company. This week it detailed a $250 million investment in Vir Biotechnology, an American group, as part of a co-operation designed to speed up the use of antibodies in vaccines.
Aside from the virus, Glaxo looks very strong, with world-leading respiratory and HIV treatments and a healthy medicines pipeline, including in vaccines. And, assuming that it goes ahead, the separation should create considerable additional value for shareholders.
The shares, up 5½p, or 0.4 per cent, at £15.14¾ , have held up relatively well in recent weeks. Trading at 16 times earnings for a yield of about 4.5 per cent, they are an attractive defensive move.
Advice Buy
Why Top-tier player in its chosen markets, well positioned for health trends and split should add value
Novacyt
Punters have ploughed into Novacyt in the hope that its tests for coronavirus will mean that the business takes off. Shares in the biotechnology company, which is listed on Aim in London and on the Paris division of the Euronext exchange, are up by nearly 1,270 per cent since January, when it first started to talk about its test.
Initially available only for research purposes, the group is now selling its high-speed diagnostics kit to more than 80 countries and as of late March had orders totalling more than £17.8 million. The test has had fast-track approval in countries including the United Stattes, Argentina and France and Novacyt is supplying more than 20 hospitals in the UK. The Anglo-French group is struggling to keep up with orders and has agreed production deals, including with companies in Britain and Germany.
Novacyt was founded in France in 2006 by a medical pathologist who developed diagnostics tools for use in cancer screening and oncology. After acquisitions, including of Primerdesign — a company spun out of the University of Southampton — it was listed in France in 2012 and in London in 2017. It is based in France, but the majority of its operations are in Camberley, Surrey. Novacyt had been reporting higher orders at its Lab21 unit, which specialises in using antibodies to detect diseases in blood or serum.
Until it negotiated a loan facility and sold off assets last year, it had a shortage of working capital, which left it unable to fulfil some orders and as a result 2019’s annual profits before tax and other items will be lower than the previous year’s €600,000. Formal annual results are due this month. Its Covid-19 test is not only establishing Novacyt’s reputation, it is also going to provide it with the capital it needs to expand its diagnostics business, through further acquisitions as needs be.
Novacyt has plenty of potential and its role in identifying Covid-19 cases is enhancing its credibility, but with no earnings per share to speak of and no dividend, its share price — off 2p, or 0.9 per cent, at 215p yesterday — is built on optimism and not profits. This columnist is happy to witness investors’ excitement, but is not advising others to join in.
Advice Avoid
Why Huge potential but as yet not enough substance
