GSK is two shots away from clean bill of health
BREAKINGVIEWS-GSK is two shots away from clean bill of health The author is a Reuters Breakingviews columnist. The opinions expressed are her own. Refiles to fix typo in paragraph 3.
By Aimee Donnellan
DUBLIN, Oct 21 (Reuters Breakingviews) - If GSK GSK.L were a patient doctors would be starting to hope that it’s on the mend. Despite being one of the cheapest of the global pharma stocks, new CEO Luke Miels is ploughing money into research and development and doing savvy deals. The big question is can he deliver on his target of over £40 billion in sales by2031.
Signs of a recovery have appeared slowly. When Miels’ predecessor Emma Walmsley was in charge, she spun out the consumer goods business which makes Sensodyne toothpaste, now called Haleon HLN.L. Investors hoped the surgery would unleash a leaner, less indebted business that could focus its efforts on dealmaking and its core areas of vaccines, HIV and general medicines including inhalers and antibiotics. So far, that's yet to translate into a material valuation bump: GSK trades at around 10 times forward earnings, in line with its multiple when Haleon was spun off in 2022, and below peers like AstraZeneca AZN.L, Novartis NOVN.S and Roche ROPC.S.
The main reason is fear of what comes next. Dolutegravir, GSK’s star HIV treatment which accounted for 17% of GSK’s near £33 billion of sales last year, loses patent protection in the US from 2028. Analysts polled by Visible Alpha expect revenue in that division to halve by 2031. Vaccines have also lost steam. Anti vaccine sentiment is growing in the US, and analysts expect the division to grow sales by an average of less than 2% over the next five years.
However, Miels is plugging these holes partly by bolstering the group’s growing cancer business. Last year, sales in oncology rose by over 40% to nearly £2 billion and they are expected to reach over £5 billion pounds by 2031. And he’s hoping to boost that further through deals and in-house drug development. In June, he splurged $11 billion on US lung cancer specialist Nuvalent. The business won regulatory approval for one of its drugs a month after the deal was announced and GSK is expecting to hear about another remedy later this year. This week GSK won regulatory backing for a new rectal cancer drug. Growth in GSK’s oncology business should help offset the decline in HIV as dolutegravir's patents expire.
The cancer success isn't the only sign that GSK's plan to boost in-house drug development is paying off. Miels is expecting to start over 20 new late stage drug trials this year. Potential blockbuster drugs include a hepatitis B remedy bepirovirsen which it reckons will generate £2 billion in annual sales. Berenberg analysts estimate the group's likely return on research investment is now over 10%, healthily exceeding the sector's 8% cost of capital.
GSK is still some way off hitting Miels' target to reach £40 billion of sales by 2031. But the gap is closing: Analysts polled by Visible Alpha estimate sales of £37 billion that year, up from less than £34 billion a year ago. To hit the magic number, Miels will probably need to do more small deals, as well as keep securing fresh drug approvals. But the danger that he will resort to more large risky takeovers is probably easing. That, along with GSK's broader turnaround, means its valuation should start to catch up with its healthier peers.
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CONTEXT NEWS
GSK will unveil its third quarter earnings on October 28.
The US Food and Drug Administration on October 19 approved GSK’s Jemperli, an immunotherapy for locally advanced rectal cancer.
(Editing by Neil Unmack; Production by Streisand Neto)
((For previous columns by the author, Reuters customers can click on DONNELLAN/Aimee.Donnellan@thomsonreuters.com))