GLAXF - GSK Shows That The COVID-19 Show Is Passing

Summary

• As predicted by some epidemiologists at the onset of the pandemic, COVID-19 would become an endemic flu-like condition not warranting mandated concern.
• The growth in sales of COVID-19 therapies and diagnostics was not secular, and plummeting Xevudy sales of GSK take the specialty medicines business down a notch.
• Moreover, people are back to vaccinating against diseases other than just COVID-19, with Shingrix sales picking up and creating margin contribution.
• Otherwise, Trelegy continues to perform on a great recurring revenue platform.
• Profit growth looks good, and the old dividend could come back sooner rather than later.

GSK (GlaxoSmithKline) ( GSK ) reported its earnings today and they looked pretty good. As we had predicted two years ago, the supposed lack of growth would not be secular, and with generics erosion out of the way, the portfolio is back to growth, more focused than ever on biopharma after the Haleon ( HLN ) demerger. COVID-19 is a headwind for GSK on a quarter basis as a more relaxed attitude to COVID-19 takes hold, but where it loses in Xevudy sales is gains in vaccines. Moreover, other important drivers of the GSK economics are growing incrementally, with profit margins developing nicely. We could see a quick return to the old dividend at this rate.

Q4 Results

Vaccines are the highest margin segment of them all, almost double any of the others. With COVID-19 being less of a mandated and actual concern for people, vaccinations for diseases other than COVID-19 are rising. In particular, Shingrix is seeing growth after being launched before an unfavourable market during the height of the pandemic hysteria. Meningitis, half as big as Shingrix, also saw vaccination catch-up with here they only manufacture. With overall 9% CER growth the margin contribution is much appreciated especially as pandemic vaccines collapsed.

Specialty medicines did well for the FY, but in this last quarter the fall-off of Xevudy revenues puts sales down 11%. Excluding that sales were up 21% CER with growth in all other areas, oncology being a new engine for the company as well as a stalwart HIV portfolio. Xevudy has poor margins compared to the rest of the GSK portfolio, so margin expansion still happened with 5% CER growth in profits thanks to Shingrix and Trelegy growth as more than an offset for Xevudy's reduction in profit contribution.

Finally, in General Medicines Trelegy is the performer providing a great contribution from a profitable recurring revenue platform, and generics erosion that peaked in 2020 and 2021 is subsiding completely. The return of other infections after very hygiene-oriented conditions is also bringing back antibiotic sales.

In general, both profit and sales growth lagged in the quarter compared to the earlier half of the year. This is primarily because of base-effects as the end of 2022 starts to lap a more relaxed situation starting in late 2021. Still, there was limited turnover declines on base effects excluding the drop-off of Xevudy revenue.

Guidance

The guidance looks good. Vaccines will continue to lead sales growth among the segments in 2023 according to management, which means that mix effects will help profit growth. Shingrix will drive things there and flu vaccines will see pressure as the patent expires. Patent expirations look reasonably defensible, but some meaningful ones like Benlysta do start in 2025 . In Oncology patent expirations are still very far out as this is a pretty nascent segment. Respiratory looks just as good with a while till Trelegy is out and so does HIV. Overall, the profit growth looks like it could be consistent and get investors back to the pre-demerger dividend levels, however economic risk is a bit more pronounced for the important vaccine segment due to its more discretionary nature.

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