GlaxoSmithKline shares have performed well this year and are up over 15%, but they are still well down from their highs of around 1,800 in 2020 and 2022. In this analysis, I look at why GSK shares are so low, if they will keep on falling and whether or not they are worth a buy for recovery.
Two major pharma companies occupy the top spots in the London Stock Exchange: Astra Zeneca (AZN) and GlaxoSmithKline (GSK).
While many assume these two are broadly ‘similar’ (large pharmaceuticals), in reality, there is a stark difference. Astra is nearly 1.5 times larger than Glaxo (£168 billion vs £62 billion).
One may argue that this is because GSK had demerged its consumer healthcare business last year into Haleon plc (HLN), itself a £32 billion market cap company. As such, GSK’s market cap should reflect this reduction in business value.
That argument is not wholly convincing. For one reason, GSK’s share price has not really proved to be a good bet over the years. Have a look at GSK’s long-term chart below.
Excluding dividends, GSK’s share prices are not much higher than a decade ago. So where’s capital growth? Every time GSK’s share price hit £17-18, prices regressed back into range. And at £15, prices are only 50% higher than its 2008 crisis lows.
In comparison, AstraZeneca’s share price, at 2023’s peak, was 6x higher than its 2008 lows of £20. If I were to put money into the biotech sector, Astra would be my top pick despite GSK’s value tilt.
Fewer profitable medicines
But what exactly is holding Glaxo back and what is the market worried about?
According to the bearish camp, GSK has a smaller pipeline of profitable medicines to power its future earnings growth. In 2022, GSK reported sales of more than £29 billion. Operating profits were a hefty £8.2 billion. Three major devisions underpin GSK results: Vaccines, Speciality medicines, and General medicines.
According to GSK’s second-quarter results, the best-selling drugs in GSK’s portfolio were respiratory-related, followed by HIV then shingles. Half-year revenue totalled about £14 billion (see bel0w).
Source: GSK (2Q, Jul 2023)
Despite GSK’s state of profitability, investors remain undecided about its future growth.
For one, GSK’s hugely profitable HIV drug – dolutegravir – is about go off the patent in a few years time. What will replace it is unknown. Moreover, GSK has no heavyweight presence in oncology, one of the most profitable biotech sectors.
And then, the market is waiting for what GSK will do with the £7 billion dividend from demerging Haleon. Earlier this year, Pfizer spent a whooping $43 billion to takeover Seagen. Amgen splashed out $23 billion to acquire Horizon Therapeutics. Even AstraZeneca forked out $39 billion in 2021 to buy Alexion Pharmaceuticals. The trend is unmistakable: Big established Biotech/pharmas are spending big to stay on top of the game. This is because the price of standing still is very high.
The market has yet to be excited by the near-term prospects of Glaxo. The stock trades at a reasonable 11x p-e; but prices are where they are now for a reason. Admittedly, the company has value. But to achieve capital growth, investors may need to look elsewhere – until, perhaps, some bullish catalysts shake off the torpidity here.