As the race continues to find a vaccine for Covid-19, it is no wonder that the healthcare sector has been firmly in the spotlight this year.
Rated four-stars by Morningstar analysts, GSK shares have not soared like some of its healthcare peers this year. Year to date, shares are down around 13% at 1547p, some way off analysts’ fair value estimate of 1800p. While the firm’s second-quarter results, published at the end of July, were slightly below expectations, Morningstar sector director Damien Conover says investors are “likely not fully appreciating an improving pipeline and strong entrenchment in vaccines and HIV therapies”.
Reduced demand for vaccines as people have avoided doctors’ surgeries this year has been a problem for Glaxo. This segment of the business was down 29% in the second quarter and sales of the firm’s leading vaccine, Shingrix, for shingles, down 19% in the period. Still, Conover expects this demand to bounce back fairly swiftly; already the monthly vaccination rate has doubled from its lows in the midst of the crisis, but only to around half of pre-pandemic levels. Glaxo has warned that a three-month delay to recovery would hit full year earnings by 5%.
Glaxo, together with Sanofi (SAN), is developing a potential vaccine for Covid-19 and has already agreed to supply the UK government with up to 60 million doses, should it prove effective. The treatment is based on the protein-based technology Sanofi has used to produce an influenza vaccine and GSK’s pandemic adjuvant technology. Roger Connor, president of GSK Vaccines, said at the time of the announcement: “We believe that this adjuvanted vaccine candidate has the potential to play a significant role in overcoming the Covid-19 pandemic, both in the UK and around the world.”
Patents Mean Pricing Power
According to Morningstar analysts, Glaxo has a wide moat thanks to its patents, strong consumer brands, economies of scale and powerful distribution network. Its patent-protected drugs have strong pricing power, says Conover. He adds: “Glaxo’s established product line creates the enormous cash flows needed to fund the average $800 million in development costs per new drug.”
Drug delays or non-approval from regulatory bodies are a risk for any drug company, and Glaxo has a medium uncertainty rating, according to analysts. Conover says another risk comes from fierce competition in the industry and from generic alternatives to its brand-name drugs, particularly its leading drug Advair, an asthma and COPD treatment.
Glaxo is a stalwart in many UK investment portfolios, particularly because of its reliable dividend payments. Indeed, the firm is yet to announce a dividend cut this year unlike many businesses which have had to scrap their payouts. Shares currently yield a tidy 5.23% and it currently tops our table of dividend-paying FTSE stocks.
And while recent returns may be rather uninspiring, the shares have delivered annualised total returns of 7.41% over five years, compared with 3.1% from the FTSE 100, and 7.04% over the past decade.
Emma Walmsley has been at the helm of the firm since 2016, after first joining the business in 2010, and under her leadership Morningstar analysts rates the company’s stewardship as Standard.
Conover concludes: “In the pharmaceutical industry, GSK ranks as one of the largest companies by total sales. The company wields its might across several therapeutic classes, including respiratory, oncology, and antiviral, as well as vaccines and consumer healthcare products. Glaxo uses joint ventures to gain additional scale in certain markets like HIV and consumer products.”