SNY - What To Expect From GSK In 2023

2023-05-16 01:29:25 ET

Summary

• GSK's operating income margin in Q1 2023 was 29.35%, showing an increase in the previous quarter and the last year.
• Vaccine sales were $2,493 million in Q1 2023, up 11.9% year-over-year, mainly due to Fluarix and FluLaval, which regulators approved to prevent influenza.
• At the end of March 2023, GSK's total debt was about $25.79 billion, a significant decrease from the end of 2021.
• Moreover, as uncertainty about Zantac Lawsuit declines, we believe that the investment attractiveness of GSK may start growing again faster than the iShares Biotechnology ETF in the current macroeconomic and geopolitical instability period.
• We continue GSK's analytics coverage with an "outperform" rating for the next 12 months.

GSK ( GSK ) is the UK's largest pharmaceutical company with a broad portfolio of medicines and vaccines targeting HIV, cancer, respiratory and autoimmune diseases. In recent quarters, management has seen more aggressive R&D and M&A policies to regain leadership in the global vaccines and HIV markets.

On April 26, 2023, the company released its financial results for the first quarter of 2023, which not only beat the expectations of Wall Street analysts but were able to demonstrate that after the completion of the spin-off of the consumer healthcare division from the core business, Emma Walmsley's business model is beginning to bear fruit.

In 2023, GSK's share price saw an increase of 3.51%, which is quite a good result, given the fierce contender from key competitors such as Sanofi ( SNY ), Bristol Myers Squibb ( BMY ), and Pfizer ( PFE ).

We continue GSK's analytics coverage with an "outperform" rating for the next 12 months.

GSK's Financial Position

The company's revenue for the first three months of 2023 was $8.58 billion, down 3.8% from the previous quarter and 9.2% from the prior year. However, at the same time, this financial indicator continues to beat analysts' consensus estimates and thus testifies to the underestimation of the company by Wall Street. Moreover, GSK's revenue is expected to maintain a positive trend in the second quarter and will be $8.41-8.72 billion, 4.4% more than analysts' expectations for the 1st quarter of 2023.

The main reason for the decline in GSK's revenue is the sharp decline in sales of Xevudy, which is a monoclonal antibody that was actively used from the second quarter of 2021 to the second quarter of 2022 for the early treatment of COVID-19, but due to the emergence of more and more new variants of the virus, its effectiveness continued to decline, which eventually led to the cancellation of its use. However, if we remove revenue from the company's COVID-19 product from the calculations, sales of most of GSK's medicines and vaccines continue to show a positive trend. Thus, the company's segment focused on developing and commercializing vaccines demonstrates its continued leadership in this multi-billion-dollar market. Vaccines sales were $2,493 million in Q1 2023, up 11.9% year-over-year, mainly due to Fluarix and FluLaval, which regulators approved to prevent influenza. We expect revenue growth in the company's vaccine segment to accelerate from the second half of 2023 due to the introduction of Arexvy, the first respiratory syncytial virus vaccine , to the US and European markets.

Since Q1 2022, GSK's gross margin has maintained an upward trend due to the stabilization of raw materials costs and the increase in the company's revenue from sales of drugs for HIV and respiratory diseases. We predict that by 2023, GSK's gross margin will reach 77.5%, and by 2024 this figure will increase to 80%, which is not only higher than the average value for the healthcare sector but also higher than that of Merck KGaA ( MKGAF ) ( MKKGY ) , Regeneron Pharmaceuticals ( REGN ), and Takeda Pharmaceutical ( TAK ). This result will be achieved thanks to continued strong demand for Cabenuva, the Hepatitis vaccine, and the expansion of the company's drug portfolio, which is either awaiting FDA and EMA decisions or being studied in pivotal clinical trials.

GSK's operating income margin in Q1 2023 was 29.35%, showing an increase in the previous quarter and the last year. The company's earnings per share ((EPS)) for the first three months of 2023 was $0.92, up 43.8% year-over-year, and just as importantly, GSK's management continues to beat consensus estimates from analysts, many of whom are conservative about the business of the leader of the British pharmaceutical industry. Moreover, GSK's Q2 EPS is expected to be $0.84, up 2.4% from the Q1 2023 consensus estimate. At the same time, GSK's Non-GAAP P/E ((TTM)) is 10x, which is 47.06% less than the average for the sector and 46.37% less than the average over the past five years, which once again indicates its undervaluation Wall Street.

We estimate that the recently announced Haleon share sale , totaling approximately $1 billion, will allow GSK to increase investment in the company's product candidates, especially in therapeutic areas such as oncology and neuroscience.

At the end of March 2023, GSK's total debt was about $25.79 billion, a significant decrease from the end of 2021. At the same time, with the growth of EBITDA in recent quarters, the Total debt/EBITDA ratio decreased to 2.12x. Given the maturities of the senior bonds and loans, we don't expect GSK to have any problems redeeming them.

Conclusion

We continue GSK's analytics coverage with an "outperform" rating for the next 12 months. GSK is the UK's largest pharmaceutical company with a broad portfolio of medicines and vaccines aimed at combating oncological, respiratory, and immunological diseases. Continued strong demand for HIV-approved Cabenuva, the receipt of royalties from future sales of Gilead's ( GILD ) Biktarvy, and a recently approved respiratory syncytial virus vaccine will be among the main drivers for GSK's financial improvement.

Also, the newly announced Canadian court ruling dismissing a class action lawsuit filed by Zantac (ranitidine) users and combined with clinical studies showing that there is no reliable evidence that it can cause cancer ultimately reduces the risks. Moreover, as uncertainty about Zantac Lawsuit declines, we believe that the investment attractiveness of GSK may start growing again faster than the iShares Biotechnology ETF in the current macroeconomic and geopolitical instability period.

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