GSK - GSK Rating Upgraded To Buy On New Earning Asset

2023-07-13 05:33:31 ET

Summary

• Some legal headwinds from previous coverage have abated.
• GSK's usage estimate for Arexvy this year is likely on the low side.
• Two upcoming Prescription Drug User Fee Act action dates for other treatments occur in September.

In previous coverage, it was recommended for longs to take profits on GSK ( GSK ) after a rare recent surge, as well as legal challenges. Accordingly, GSK underperformed the broad market by 17% from the publication date. The company since dodged a class action suit from ranitidine users in Canada, which was dismissed by the British Columbia Supreme Court, and settled a California case . They then welcomed the approval of Arexvy by the US Food and Drug Administration ( FDA, on May 3 ) and the European Commission on June 7 , to become the first respiratory syncytial virus (RSV) vaccine in the world for older adults. Investors can also look forward to Prescription Drug User Fee Act (PDUFA) action dates of September 16 for momelotinib in myelofibrosis and September 23 for Jemperli’s (dostarlimab) supplemental Biologics License Application (sBLA) in endometrial cancer. The share price dip along with the above developments and likely successful Arexvy launch in time for RSV season make GSK a Buy again.

Arexvy was recently approved by EU and US regulators for prevention of lower-respiratory tract disease (LRTD) due to RSV in people aged 60 and over. RSV leads to 6,000-10,000 deaths and 60,000-160,000 hospitalizations annually among adults 65 years and older. Hospitalizations were depressed during most of the COVID-19 pandemic, before spiking again the past winter (Figure 1). Vaccination would ideally be in place before the onset of increased RSV activity, which varies each year. Given that the Centers for Disease Control and Prevention ("CDC") recommended that healthcare providers “should therefore offer RSV vaccination as soon as vaccine supply becomes available .”

Figure 1. RSV Hospitalizations from 2017 to December 2022

On June 21, the CDC’s Advisory Committee on Immunization Practices (ACIP) met and voted in favor of recommending RSV vaccines for adults aged 60 and older in consultation with their providers. GSK is exploring the efficacy of Arexvy in the 50-59 age population. They presented data at the ACIP meeting on a large-scale Phase 3 study which showed a single dose of Arexvy was effective in around 25,000 elderly participants for two full RSV seasons in protecting against LRTD and severe disease in people aged 60 and older, including those with underlying medical conditions. There is no head-to-head trial, but Arexvy has the numerical edge against Pfizer’s ( PFE ) Abrysvo for efficacy in preventing severe LTRD defined by three or more symptoms at the end of the first season ( 94.1% vs 88.9% , respectively) through the middle of a second RSV season (84.6% vs 78.6%), as well as for less severe LTRD (82.6% vs 65% in Season 1 to 77.3% to 48.9% in Season 2).

The outgoing CDC Director signed off on ACIP’s recommendation, allowing the Arexvy and Abrysvo to be made available this Fall. As vaccines, they will be universally included on formularies (prescription drug plans or PDPs). An earlier February article noted that 4 of GSK’s non-vaccine/COVID-19-related 'Innovation' products launched this decade needed broader insurance coverage in the U.S. The following update for Q2 examined coverage compiled directly from official websites of the Top 20 payors that control 63% of market share with 46 million covered lives.

How to read Table 1:

Tier # Higher Tiers have higher cost share. Drugs in Tier 4 or higher (in 5+-Tier plans) are non-preferred brands and may also include drugs recently approved by the FDA or specialty drugs and may need special handling.

Sp Specialty drugs are used to treat difficult, long-term conditions and may need to get filled through a specialty pharmacy.

PA Prior authorization is the process of obtaining approval of benefits before certain prescriptions may be filled.

NF A non-formulary drug is not included on a plan's Drug List. Exception processes such as PA or Step Therapy could be available to request coverage for a NF drug.

X Not Covered drugs are specifically excluded from coverage by the terms of the plan. Patients likely won't get any reimbursement will have to pay out-of-pocket for these drugs.

Table 1. 2023 Coverage of GSK Innovative Products at 20 Largest Health Insurance Companies in the U.S.

As before, Rukobia, a treatment for multidrug-resistant HIV-1 infection, was found on almost every formulary and GSK’s lineup did well with top-ranked Kaiser Permanente. The drugs are also available to Californians buying insurance from the Health Insurance Marketplace. No. 2 Elevance Health ( ELV ) now has an exception process available to request coverage for Apretude, the first and only long-acting injectable pre-exposure prophylaxis (PrEP) option to reduce the risk of sexually acquired HIV-1. However, Jemperli, a treatment for some endometrial and solid tumor cancers, remains sparsely covered.

Financials

In the first quarter, GSK beat estimates on both earnings per share and revenues, but the news wasn't well received as shares fell 2.66% on April 26. Using the £1/$1.22 average exchange rate (‘AER’) for Q1, GSK's Vaccine franchise sales of $2.49 billion showed an impressive 22% growth over 2022 at AER, better than the preceding quarter's 17%. Vaccines now comprise 29.4% of total sales (Figure 2), inching up from Q4's 28.1%. U.S. vaccine sales topped $1.20 billion in Q1 and achieved a 30% ratio, led by Shingrix for meningitis ($620 million). Seeking Alpha’s Quant system rates Growth as an ‘D-’, but likely doesn’t take into account the impact of vastly lower pandemic adjuvant sales last year compared to 2022.

Figure 2. Quarterly Product Sales (in $ millions)

Takeaways

RSV causes a heavy burden on the U.S. health system. It’s return to pre-COVID levels come as people become lax about wearing masks around high-risk individuals, washing hands, and cleaning surfaces, which all contribute to the spread of the virus. During the ACIP meeting, GSK gave a price tag of $200-$295 per dose and estimated a market of 10-15 million people this year. That means $2-$3 billion split with Abrysvo, but would be enough to propel Arexvy to join Shingrix as GSK’s top two best selling vaccines in the U.S. and greatly bolster the franchise. A recent survey found that 85 % of responding clinicians couldn’t list the main RSV risk factors (age >65, chronic lung disease, chronic heart disease, and being immunocompromised), among other things. This knowledge gap, while disturbing, doesn’t deter from their awareness of RSV’s dangers. If anything, ignorance could make the prescribers push vaccination for everyone age-appropriate to cover their bases, so to speak.

If RSV trends continue this decade, it is reasonable to expect a vaccination similar uptake with the flu shot. As of March 2023, flu coverage was 71.0% in adults 65 years and older, compared to 51.8% with adults 50-64 years of age. According to real-time estimates, there are 58.2 million in the 65+ age group and 21.2 million from 60 to 64 years old. That represents 52.3 million who are more likely than not to get the RSV vaccine, which in turn equates to a seasonal $10.5 billion market every two years just in the U.S.

To conclude, GSK is one of the five stocks promoted for their dividends that have all underperformed among personal recommendations since last year (Figure 2). Unfortunately for Longs, the stock literally fell victim to the "Sell in May" doldrums, falling from the month's high of $37.22 on May 3 to $33.39 on May 31 (-10.3%). The Big Pharma group has gotten even worse the past couple of months relative to the reference SPDR S&P 500 Trust ETF ( SPY ). This record and the more obvious vaccine hesitancy divide along political lines among Americans are the major risks to the current bull thesis. Wall Street is hedging, which is reflected by downward revisions causing the Revision grade to drop to A- from A+ just a week ago. However, an earlier RSV season coupled with a highly-publicized Arexvy launch could render GSK’s estimates to the conservative side. Two PDUFA dates provide additional major positive catalyst events. Therefore, despite an apparent movement by the market away from high-yield large-caps as suitable defensive healthcare stocks in a bear market, GSK is upgraded to a Buy.

Figure 2. Performance of CSI’s Buys and Strong Buys from September 2022 compared to SPY

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