GSK targets £20 billion in annual sales from current late-stage pipeline

GlaxoSmithKline on Wednesday outlined its strategy over the coming decade following the planned demerger of its consumer healthcare business in mid-2022, with the company eyeing sales of more than £33 billion ($46 billion) by 2031, a target JP Morgan analysts said was "far above" their expectations. GlaxoSmithKline suggested growth would be driven by its current late-stage pipeline, which it believes can deliver peak annual sales of over £20 billion ($28 billion).

CEO Emma Walmsley remarked "I am very aware that [GlaxoSmithKline] shares have underperformed for a long period." However, she said "we are now ready to deliver a step-change in growth...and unlock the value of consumer healthcare," having first unveiled details of the planned split in late 2018, when GlaxoSmithKline agreed to combine the segment with Pfizer's consumer brands in a joint venture.

Scrutiny of the plan, and questions over whether Walmsley is the right leader for the new pharma-focused company, have increased after it emerged in April that Elliott Management had acquired a substantial stake in GlaxoSmithKline. When asked why she intended to run the pharmaceuticals business post-demerger given her background in consumer health, Walmsley remarked "I am a change agent, I am a business leader, and I am very excited about the new plans."

'New GSK' to focus on vaccines, specialty medicines

The UK drugmaker noted that since 2017, when Walmsley took over as CEO, it has achieved 11 major product approvals and doubled the number of assets in Phase III and registration to 22, while new and specialty products have reached £10 billion ($14 billion) in annual sales. Between now and 2026, it said the "New GSK" focused on vaccines and speciality medicines is targeting yearly sales growth of more than 5%, which is broadly in line with analyst expectations, with adjusted operating profits expected to grow by over 10%. The outlook excludes contributions from COVID-19-related revenue.

Vaccines and specialty medicines – centred on the four core areas of infectious diseases, HIV, oncology and immunology/respiratory – are projected to grow to around three-quarters of sales over the next five years. Specifically, vaccines are expected to see high-single-digit percentage gains through 2026, while sales from specialty medicines are forecast to climb at a double-digit percentage in that time. At the moment, the pipeline includes 20 vaccines and 42 medicines, and the company says it is leaving the door open to venture outside its core focus areas, to "where there are scale opportunities rooted in immune science and genetic validation."

GlaxoSmithKline noted that changes to its portfolio within vaccines and pharmaceuticals have led to annual cost savings of £500 million ($700 million), while proceeds from offloading non-core brands has hit £1.4 billion ($2 billion). However, the company says it can trim another £200 million ($280 million) from its yearly expenses, so it has revised its cost savings target from £800 million ($1.1 billion) to £1 billion ($1.4 billion). "All restructuring programmes will complete in 2022 and no further major restructuring programmes are planned," it added.

Not a clean break from consumer health

Meanwhile, GlaxoSmithKline shareholders will receive stock in the new consumer healthcare group amounting to at least 80% of the 68% stake that the drugmaker currently holds in it, with Pfizer owning the remaining 32%. GlaxoSmithKline will keep up to 20% of the consumer-health business as a short-term investment, which it could then sell "in a timely manner" in order to strengthen the balance sheet. Jefferies analysts have put the consumer unit's value at about £45 billion ($63 billion), implying GlaxoSmithKline's 68% stake is worth £30 billion ($42 billion), with proceeds from selling 20% of that likely to be £6 billion ($8).

The company is also cutting its dividend to £0.55 in 2022, with the payment set at £0.45 in 2023 after the split. Prior to the demerger, New GSK is also expected to receive a dividend of up to £8 billion ($11 billion) from consumer healthcare, with chief financial officer Iain Mackay saying this dividend would be the "most significant" component of its plans to achieve a robust balance sheet for the pharma-focused firm. GlaxoSmithKline plans to give a "comprehensive update" on the prospects for the new consumer healthcare business in early 2022.

Analysts at JP Morgan said "we see the key positive for the market today being a smaller dividend cut than feared; we see the key negative…being the 20% sale of the consumer stake, which will dilute GlaxoSmithKline shareholders' exposure to this segment, and which could see some value going to the taxman." The analysts added they will also "need to understand how [GlaxoSmithKline plans] to get to their ambitious 2031 revenue target," particularly in light of upcoming patent losses for its HIV treatment Tivicay (dolutegravir) in 2028 and 2029 in the US and Europe.

Chris Beckett, head of equity research at Quilter Cheviot, suggested GlaxoSmithKline's "rationale for an ongoing investment in the consumer business will need to be explained by the executives. Investors won't appreciate the overhang." Beckett indicated that the dividend reset works out at a 31% cut, which "is hardly good news, but it is not unexpected."

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