Why I am unable to shrug off my disappointment in GSK
In the quiet cool down to Christmas, I am keen to take a look at some of the companies that readers have been asking for some more detailed analysis on.
Thank you to johnsmith68 for your GSK (LON:GSK) request. This is the first company I analysed when I became a financial journalist and it taught me a lot about investing in the pharmaceutical industry.
Jargon like ‘blockbuster’ (a drug which makes more than $1bn in revenue in a single year) and ‘patent cliff’ (when big selling medicines are due to lose their patent protection) are crucial to those attempting to navigate the industry. Prior to studying GSK, I didn’t know that pharmaceutical patents only last ten years at which point the active ingredient in medicines becomes an open book, free to face competition from generic competitors. Big pharma companies can prolong their patent cliffs by investing in label extensions or protected delivery mechanisms for their top selling medicines, but innovation in new areas is better.
Back in 2014, the big trends within the pharmaceutical industry were biologics (medicines which use living components, rather than the traditional chemical ingredients found in pharmaceuticals) and genetics (the use of targeted therapies which treat the underlying cause of bodily malfunction, rather than its symptoms). Today those types of medicines dominate the industry. Drugs are increasingly expensive to produce, but far more efficient in treating patients.
A disappointing decade
I tend to look at GSK through a disappointed lens. When I first started covering the company it was reliant on its suite of respiratory medicines, which were protected from the patent cliff by their complex delivery mechanisms. Nearly a decade later and respiratory medicines remain very important at the company, while research and development expenditure has lagged the wider industry meaning sectors like rare disease, neurology and oncology remain conspicuously absent in the GSK drugs pipeline.
It’s also been a disappointing decade for investors. Here is the share price chart for GSK over the last ten years:
And here is how that compares to the company’s Danish pharma peer, Novo Nordisk:
While Novo’s share price has risen over 500% to make it the largest company in Europe, GSK shares have fallen 15%. It’s true, investors have received a decent chunk of dividends in that time. Between 2014 and 2021, the company paid an annual dividend of 80p per share and added a 20p special in 2016. But that payout was cut in 2022 and again last year.
Investors have received a total of 700p per share of dividends in the last decade, which provides some compensation for the abysmal share price performance (but still I would have rather owned Novo Nordisk).
But this article is about whether GSK is worth taking a look at now. Does the price to forecast earnings rating of 8x represent a buying opportunity? Or are the ongoing challenges with the US pharma market, plus the disappointing track record at GSK enough to keep me on the sidelines?
Research and development: where is the growth coming from?
A key metric when I am looking at pharmaceutical companies is research and development expenditure as a percentage of revenue. At GSK, this has averaged 18% in the last four years, which puts it at the lower end of the spending spectrum compared to some of its peers. AstraZeneca’s R&D spending has averaged 22.7% in the last four years, 25.7% at Eli Lily and 21.5% at Merck.
But 18% (rising to almost 19% in 2023) is still a big improvement for GSK. In both 2014 and 2015, the company spent £3bn on research and development, equivalent to just 13% of revenues. And by 2021 (the final year before the demerger of Haleon), the company was really paying the price of its lack of investment. Annual revenues were £24.7bn - just £1.7bn higher than seven years previously. New drugs had failed to fill the gap left as older blockbusters came off patent.
Today the company’s spending is still relatively heavy in the respiratory region. Nine of its final phase human trials are in respiratory or immunology, and three of these are label extensions to drugs that already exist. The company also has seven phase three trials in oncology, six in infectious disease and an earlier stage pipeline in HIV.
By contrast, British peer AstraZeneca has 32 final stage trials in oncology alone. It also recently revealed a breakthrough in the treatment of asthma attacks thanks to early stage human studies into one of its existing respiratory medicines.
But GSK’s management is insistent that its own slightly uninspiring pipeline will help protect it from the falloff in sales when one of its key medicines comes off patent.
Between 2028 and 2030, Dolutegravir will lose its two patents in most major drugs-selling countries (starting with the all-important US). Dolutegravir is sold via four key brands, which together contributed £1.4bn of revenue in the third quarter of 2024. That is equivalent to 47% of speciality pharma sales and 18% of group revenue.
There are other red flags within GSK’s innovation potential. In 2024, the company’s fairly new virus vaccine Arexvy has failed to live up to expectations. In the third quarter, sales fell 74% to £188m, putting it on par with the company’s older vaccines - not what investors would have expected from a novel vaccine that has its patent protection and has only been available for two years.
Is this an income stock?
Despite the dividend cuts of the last few years, GSK still returns over £2bn of cash to its shareholders via dividends every year. That’s equivalent to about half of its free cash flow. The forecast dividend of 60p for FY2024 yields an attractive 4.5% at the current share price. In FY2025, the dividend is expected to rise to 64p per share - a 4.8% yield.
And for now, that dividend looks relatively well protected. It is covered by cash flow and by earnings (assuming no major decline in the company’s operating performance). GSK’s net debt position is also in a more stable position since the demerger of the consumer goods business, Haleon. Net gearing has fallen below 100%.
Megan’s view
GSK is trying valiantly to redefine itself as a “global biopharma company”. Rolling out consumer health and investing properly in new medicines is helping.
The company remains frequently hamstrung by unfortunate incidents. De-merging Haleon revealed some problems with one of the company’s former super-star drugs, Zantac, which descended into a series of class-action lawsuits. The litigation has hung over GSK for the best part of two years, but most of the claims were settled (to the tune of $2.2bn) in October.
But anyone who expected that shrugging off the Zantac litigation would provide the share price with some stimulus has been disappointed. Weak results from new medicines have overshadowed any relief that the legal wrangling is now over.
And then there is the fact that the US pharma market (54% of the company’s third quarter revenues) is facing upheaval as Donald Trump prepares to take office.
In January of this year, a restriction on the rebates paid by drugmakers to the Medicaid insurance programme was removed, effectively increasing the amount pharma companies might have to spend to have their medicines covered. Trump isn’t expected to reverse that decision.
Protectionist policies are also expected to raise costs of research and development in the US. Additionally, the choice of anti-vax advocate Robert Kennedy as the head of the health department isn’t expected to do much to support vaccine sales.
I’d summarise that at these levels GSK shares do look cheap and they should provide a decent chunk of income for investors in the coming years. But I can’t see a turnaround in the growth trajectory just yet.
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28 comments
excellent article, thank you! Perhaps highlights the Warren Buffett question of why distribute cash if the company is achieving a return on invested capital in excess of the dividend yield?
I've talked to former employees who say GSK's internal bureaucracy is off the scale compared to that of competitors. This makes me think there is potential here but that it will only be unlocked when they appoint a CEO of the calibre of Pascal Soriot as AZN
Thanks Megan for the work put into this review - I found it hepful to have the various ratios (R&D as % of turnover etc) discussed. I was a shareholder for eleven years and - by coincidence - finally threw in the towel on 4th December - 9 days before your article was published. Capital loss over that time = 33% (helped by a few drip feed investments over the first 18 months after the initial purchase, purchased at deceasing prices), dividend income = 51% of investment, so up less than 2% p.a. overall - definitely not the return a blue chip investor expects.
Considered alongside some other blue chips where the dividend looks good but barely makes up for the capital performance (I'm thinking SDRC, RKT that I also sold recently and VOD, thankfully sold years ago) it made me think - would some research/article along the lines of "Is there a corellation between initial dividend yield and the total return achieved 3/5/10 years later? - a blue chip review" be of interest to readers ?
I sometimes use GSK (LON:GSK) as a case study when I lecture.
1. In the 2000s GSK was a 'thought leader under JP Garnier (despite his many faults).
2. I feel that GSK got affected by the appointment of CEOs and board members whose vision only extended as far as the next dividend payment. Looking at the balance sheet from 2014 you can see that long term debt increased from £15.8bn to £22.58bn (total debt from £18.78bn to £30.5bn) - all numbers from Stocko
3. One might therefore argue that despite the cashflow generation of the business, that acquisitions plus dividends were leading to increasing debt and debt / share so shareholders were confusing return on capital with return of capital (increasing debt to pay dividends is effectively a return of capital). This is also perhaps reflective of the UK Stock market which is (/was) more obsessed with dividends than with total return and led to a number of large caps over-distributing rather than focussing on growth.
4. The business has really failed to get 'escape velocity' in areas outside of its core respiratory, HIV and vaccines businesses. (There may be a few more areas (eg Paxil (depression) / Zantac (stomach ulcers)) I have forgotten but you get the point). I believe that part of this is that the board has comprised the great and the good rather than scientists and true investors - and similarly with the leadership of the company.
5. The spin-out of various bits has been not from a position of strength but from a position of weakness. [Note however the consumer health business etc did mean that overall R&D to income is distorted and it would be wise to look at R&D to income for the pharma division as a stand alone].
6. One very old fashioned number that I look at is book value / share - simply to see if it is growing in order to assess whether the business is overdistributing. The last five years have been disappointing.
7. In some ways GSK is the 'Intel' of the pharma sector. Was once dominant but lost its way. It has then resulted in splitting itself up. But unlike Intel (at least until recently), GSK has not really been led by scientists since about 2008 and that shows.
8. GSK has done various acquisitions / partnerships and other forms of deals. Two examples of this are the GSK - Novartis Consumer Healthcare Joint Venture and the GSK-Pfizer consumer healthcare jv. Forget the economics and the strategic rationale for a moment. To me large cap companies doing such joint ventures always smells of a maturing business where the parent is desperately trying to get growth by synergies of distribution / cost cutting - ie it is an admission that they have neither the ability or the interest to grow the business themselves.
9. GSK has perhaps been tainted by a number of bribery scandals over the years. The issue this raises in my mind is where is the ethical compass within the company.
I disagree with most of it. The poor performance in the past two years has been caused almost entirely by the ludicrous Zantac legal cases and , recently of more import, by weakness in the vaccine division. Otherwise the comments could be applied to almost any mainstrean pharma company.
Interesting article. Yet, GSK remains a permanent fixture in the R & D breakthrough screen sourced by Jack Hough. I did read that GSK were not bothered about the COVID vaccine market as they had a strong pipeline of longer term drugs. Astra zeneca have been threatened with litigation due to side effects from their vaccine. A mixed picture
Even if the strategy is to buy and hold for a long time, it should contain clearly defined conditions under which the shares should be sold for underperforming. When those conditions are met it, the strategy will help holders to act decisively to cut losing positions, and move on.
Your charts say a lot.
By trading in and out one could have made between 3 and 4 pounds a share consistently over those years plus the income if one was holding at ex-dividend time.
Liquid stocks, trading on two exchanges in volume and paying a dividend are my hunting ground. Oil majors, Tobacco stocks and Utilities are other examples. To hold Novo Nordisk or Astra Zenecca all that time I would have to know or research something on the Pharma sector.
General Sentiment towards any sector is another element easier to measure than the fundamental trends you highlight. Buy when out of favour, Sell when too popular. Anyone who bought Novo Nordisk this summer is sitting on a big loss.
Many ways to play the market.
This is a really interesting take, thank you.
apologies all ofr the use of a sharepad chart (!) but here is my take on GSK, buy ~£13, sell ~£18 has worked several times on this range bound share
Really interesting, I am buying. One of the 20 stocks in my 2025 portfolio.
This level of market timing is well beyond me! Do you have any views on particular chart signals that provide a good indicator of general sentiment enabling one to 'buy when out of favour and sell when too popular'? To achieve the buy and sell positions on your chart implies pretty much perfect timing and if it can be done is likely to be highly profitable.
Perfect timing is only achieved by liars.
However the general trend can be recognized. Some like to get in early, others wait for confirmation.
I use RSI Relative Strength Indicator a lot. Sell when over 70, Buy when under 30.
Great article - thanks! GSK has certainly been disappointing when you compare it to the likes of Novo Nordisk and Eli Lilly, etc.
I was also lured by the apparent cheapness of GSK and held it from 1550 down to 1500 before cutting losses. Whenever I’m staring at something wondering why it’s so cheap and yet getting cheaper I tend to accept that I’ve missed something, and in this case the pipeline quality is just not fathomable unless you’re a sector specialist.
I have found that high value stocks on Stockopedia often carry a lot of debt. I think it is a weakness, of the rankings, that debt is not taken into account enough. Most UK large caps have high debt, most US are cash rich.
3% stop loss... tight!
Have a look at Hedley Rees's Substack postings on Pharma for a possible wake-up call.
Thanks Megan, that's a really useful primer. I do have some GSK (LON:GSK) partly for the income and partly for the recovery potential but I'm starting to wonder if the opportunity cost is worth it. The chart suggests that the only way should be up but it's a dispiriting stock to own!
Hi Megan,
It’s also been a disappointing decade for investors. Here is the share price chart for GSK over the last ten years:
I think you are being overly charitable to GSK (LON:GSK) with this statement - the disappointment has been over the last 25 years! This stock was one of the first individual equities I invested in back in the heady days of 1999(!). Pharmaceuticals and Biotechnology seemed to be participating in the Dotcom boom and GSK (LON:GSK) which at the time was Glaxo Welcome plc seemed well placed to benefit. I made some decent trading returns on other more speculative biotechnology type businesses some of which are still around (Incyte (NSQ:INCY), Affymetrix Inc (NSQ:AFFX^D16)) as well as Oxford Glycosciences (acquired by Celltech which became part of UCB SA (EBR:UCB))and Cambridge Antibody Technologies (acquired by AstraZeneca (LON:AZN). However, Glaxo Welcome plc which in 2000 merged with Smith Kline Beecham to become GSK (LON:GSK) proved not to share in the excitement. Sadly after nearly 25 years the stock price remains underwater versus my original cost which is staggering when you compare it with the likes of AstraZeneca (LON:AZN) and as you accurately observe, Novo Nordisk A/S (CPH:NOVO B)
I frequently ask myself why I continue to hold this absolute dog of a share! As you suggest it can only be the £4K+ dividends received over the years and the apparent sustainability of the dividend payments going forward. The temptation in any new year clear out is to move onto pastures new where significant capital growth and a decent dividend might be forthcoming. Inevitably if I do bail out there will be some good news and the share price will suddenly rocket but surely 25 years is enough time to suffer this dreadful performance!
To be completely honest with you, I knew I was being overly charitable. This really is such a poor company, which has perpetually disappointed investors.
I find the comparison with Astra really interesting. The company was also in a pretty bad way when Pfizer came calling in 2014. It shrugged off the bid, and invested heavily in R&D. Now it's better than GSK even in the areas of medicine that GSK once claimed to be the leader in.
I suppose a positive takeaway is that big British pharma companies can be turned around and in the meantime, you're getting some cash (not an especially exciting amount though). I don't think the current management can do it - GSK need their own Pascal Soriot.
Thank you Megan, very helpful. I am a long term holder of GSK. When I bought them many years ago they looked better value than Astra Zeneca. Big mistake!
As you will see from my lengthy comment I share your big mistake!! Perhaps sell GSK (LON:GSK) and reinvest in AstraZeneca (LON:AZN) or Novo Nordisk A/S (CPH:NOVO B) is the way to go but then their valuations look quite extended so might be headed for a fall!
I'm not interested in GSK (LON:GSK) but would welcome coverage on Novo Nordisk A/S (NYQ:NVO). Novo shares have fallen back recently.
I must say, the thought of looking at Novo makes me a lot more excitement than looking at GSK. I had a look at the results of the Polar Capital Healthcare Trust this morning, there are some interesting pharma companies in their portfolio which I also might try and have a closer look at.
I would also love you to look at Novo Nordisk A/S (NYQ:NVO) - I have done very well out of it but am interested in whether to hold or take the money! Sadly I also hold GSK (LON:GSK) and completely agree with the downcast sentiment. Fortunately, it is my smallest position but I think this thread has helped me to decide that it will have to go!
Thanks, Megan. Useful insight into the industry.
Why invest in the pharmaceutical industry, especially the big companies? It has a long and well documented history of dishonesty and is very probably going to face ever increasing numbers of law suits. Look at Bayer and its purchase of Monsanto. The same future for Big Pharma?