GSK struggles to make investors believe its growth story

The UK’s two biggest listed drugmakers both celebrated a strong start to 2023 this week and confirmed their forecasts for the rest of the year.

But while AstraZeneca’s growth story is well established, Emma Walmsley, GSK’s chief executive, is still trying to convince investors that she is delivering a “new chapter of growth” after many years of underperformance.

GSK shares are down 3 per cent over the past five years while AstraZeneca’s have soared more than 125 per cent. AstraZeneca shareholders are willing to pay 20 times forward core earnings per share for 2023, GSK’s are paying just 10 times.

Michael Leuchten, a UBS analyst, said investors were still waiting for GSK to show progress in its pipeline of drugs to help address patent expiries later in the decade. “The big difference between AstraZeneca and GSK is that one has a pipeline, the other one, not so much,” he said.

Gareth Powell, head of healthcare at specialist fund manager Polar Capital, said AstraZeneca’s success in oncology had been particularly important. The company had created “really big drugs”, he added. “If you look at GSK, the mega blockbusters are few and far between.”

But Walmsley believes GSK is changing. Last year it completed its biggest restructuring for 20 years, spinning off its consumer health division, which sells over-the-counter medicines, as Haleon. It is using a £7bn dividend from the split to make acquisitions to fill its pipeline, including agreeing a $2bn deal in April to buy Canadian biotech Bellus Health.

GSK’s vaccine division has developed the first ever vaccine for the common infection respiratory syncytial virus, which it believes presents a similar sized market opportunity as its shingles vaccine, which generated £833mn of sales in the first quarter. Walmsley said this week that she believes the vaccine is just “days away” from regulatory approval.

Dani Saruymper, a portfolio manager at Pacific Asset Management, said Walmsley, who took over six years ago, was dealt “an incredibly challenging hand” and is not given enough credit for the changes she has made.

“GSK is a supertanker and invariably when you are trying to turn the ship, it takes a bit of time,” he said.

Heartburn hangover

In the summer of 2021, US hedge fund Elliott Management urged the GSK board to consider a sale of its consumer health joint venture with Pfizer. By Christmas, Unilever had offered £50bn. GSK and Pfizer turned them down, hoping for £60bn.

Now, after the spin-off in July 2022, Haleon shares are up 14 per cent, though with a £32bn market capitalisation, it is significantly below the rejected bid.

Some GSK shareholders are pleased with the split. Powell said it was a “super smart” way to allocate capital.

One healthcare investor said it made strategic sense — but was overshadowed by worries about legal liabilities related to claims, which drugmakers deny, that heartburn drug Zantac, causes cancer. The saga has wiped billions off GSK’s stock, and that of other pharma companies that have owned it.

“The unfortunate thing for them was that within weeks of the spin, they suffered from the Zantac explosion,” the investor said. “Sadly that means they don’t get the full value for any of their underlying business.” 

Despite a victory last December that dismissed thousands of lawsuits claiming Zantac causes cancer, GSK still trades about 17 per cent lower than when the worries about Zantac emerged in August last year. GSK said it will contest the cases vigorously but with court dates set into 2024, the hangover is likely to persist.

Investors are now focused on how GSK spends its Haleon dividend. It must choose wisely because it has less firepower than many of its rivals, including Pfizer, which is buying oncology biotech Seagen for $43bn, and Amgen, which is set to acquire Horizon Therapeutics for $28.3bn.

Some shareholders questioned why it chose to re-enter oncology, a market Walmsley’s predecessor Andrew Witty had left, which is lucrative but very competitive.

Leuchten said GSK’s strategic direction in oncology is in question, after its Ovarian cancer drug Zejula suffered a setback, limiting its use in some patients because of safety concerns. It is also waiting for more results for its bone marrow cancer drug Blenrep, after one study showed it did not outperform a rival drug.

The healthcare investor said AstraZeneca had benefited from “very fortuitous” timing, investing in oncology as the science made great leaps forward over the past decade, whereas GSK, coming later, had a “high-risk/high-reward strategy”.

AstraZeneca then built on its success, the investor added, so it now has a pipeline with drugs based on every current promising approach to cancer.

Big gap to fill

GSK itself acknowledges that it will limit its bets in a competitive field. On the company’s first-quarter earnings call this week, Walmsley said oncology was a “small but emerging” part of the business, and stressed the company’s leadership in infectious diseases, which account for two-thirds of the drugs in its pipeline target.

“It feels like they are pivoting back slightly into their historic therapeutic areas of success,” the healthcare investor said.

Chief commercial officer Luke Miels told the Financial Times at the end of last year that he was looking for bolt-on deals that can help fill the gap when GSK’s HIV medicine dolutegravir loses market exclusivity later in the decade.

It is a big hole to fill: products using dolutegravir generated £1.3bn in the quarter, about 19 per cent of total revenues of £7bn.

Leuchten said he believed the company was “too bullish” about its ability to replace revenues with its newer HIV drug. “I am worried about it because that is a very, very, very profitable part of their business,” he said.

But Saruymper said he thinks the company is being cautious about publicising its progress in HIV, because of fierce competition from US biotech Gilead.

The deals GSK has done so far will not on their own fill the gap left by dolutegravir but Andrew Baum, an analyst at Citi, said there was “clearly upside” to the Bellus deal, which gives GSK a specialist medicine to treat a debilitating condition called refractory chronic cough that affects 10mn people.

But even though the healthcare investor believes GSK has more promise than it gets credit for, she said it has no presence in “multibillion-dollar opportunities” elsewhere, such as Alzheimer’s and obesity.

“In the UK market, you can choose between AstraZeneca, or GSK, or own both. It has been very obvious where the incremental [investor] money is being spent.”