GSK (GSK, Financial) is one of the world's largest pharmaceutical companies, specializing in developing and commercializing medicines to combat HIV and respiratory diseases. Moreover, in recent years, the company has continued to actively expand its portfolio of vaccines to combat infectious diseases, including those caused by viruses and bacteria such as respiratory syncytial virus (RSV), herpes simplex virus (HSV), hepatitis B virus (HBV), influenza viruses and rotavirus.
Author's elaboration, based on quarterly securities reports
Investment thesis
The company's share price has moved sideways in recent months due to two key factors. The first is the growing concerns among financial market participants regarding the ongoing Zantac litigation, as plaintiffs claim that its use has led to the development of cancer. The second factor that negatively affects the investment attractiveness of the pharmaceutical industry is President Biden's Inflation Reduction Act, which also aims to reduce the cost of prescription drugs for Medicare beneficiaries.
However, we believe that the impact of these two risks on the company's financial position is overestimated, and the continued growth in demand for its drugs and vaccines is one of the key investment thesis making GSK an attractive asset for conservative investors.
GSK's financial results continue to exceed analysts' expectations
On November 1, 2023, the company reported third-quarter 2023 financial results that exceeded both our and analysts' consensus expectations, driven by stronger demand for its vaccines and drugs targeting HIV. Moreover, GSK has increased its financial guidance for full-year 2023.
Author's elaboration, based on the company's press release
GSK's vaccine sales amounted to a record $4.03 billion, an increase of 60.3% compared to the previous quarter. We highlight several factors of sales growth of this company's product group.
Author's elaboration, based on quarterly securities reports
First, even though Arexvy, the first FDA-approved respiratory syncytial virus (RSV) vaccine, was launched only in mid-August 2023, its sales amounted to $880 million.
We expect the company's product will continue to be a leader in the global RSV vaccine market due to its higher efficacy and more favorable safety profile relative to Pfizer's Abrysvo. The second factor that contributed to the increase in sales of GSK vaccines is Shingrix, which was approved for the prevention of shingles and post-herpetic neuralgia. Its sales amounted to approximately $1.04 billion for the three months ended September 30, 2023, an increase of 15.7% compared to the previous year, due to the rise in its price, expansion of the geography of its use, and growth in demand in Europe and the United States.
The second key contributor to improving GSK's financial position was medicines approved by regulatory authorities to combat HIV. Its sales were approximately $2.04 billion in the third quarter of 2023, up 15.7% year-over-year, driven by royalties on Gilead Sciences' Biktarvy (GILD, Financial) sales and continued strong demand for Dovato, Juluca, and Cabenuva.
Author's elaboration, based on quarterly securities reports
Sales of Cabenuva (cabotegravir/rilpivirine), an injectable medication, were $228 million for the three months ended September 30, 2023, an increase of 85.4% year-over-year despite increased competition in the global HIV drugs market.
Author's elaboration, based on quarterly securities reports
The main reason for the growth in sales of this drug is that patients switch to it from competitors' products since Cabenuva is administered every two months, while the existing standards of care for adults living with HIV require the use of medicines every day.
GSK's margins continue to rise year on year
Despite increased competition in the global oncology drugs market and the company's increased R&D spending, rising demand for its branded drugs and vaccines has a positive impact on GSK's gross margin, which continues to grow year on year and also outperforms its competitors, such as Takeda Pharmaceutical (TAK) and Sanofi (SNY).
Author's elaboration, based on GuruFocus and Seeking Alpha
GSK has one of the highest dividend yields among pharmaceutical companies
In addition to those investment theses that have already been discussed earlier, we highlight one more, namely GSK's dividend yield, which is about 4%. This figure is significantly higher than the average value of the healthcare sector.
Author's elaboration, based on GuruFocus and Seeking Alpha
Given the relatively rapid pace of expansion of the portfolio of product candidates, the high dividend yield is a factor making GSK an appealing investment opportunity for long-term investors.
GSK Q3 2023 financial results and outlook for the 2H 2023
The company's financial results for the third quarter of 2023 were extraordinary, excluding lower sales of Fluarix and FluLaval and continued sluggish demand for the company's Established Vaccines.
GSK's revenue continues to grow year over year and quarter over quarter, and more importantly, it beat analysts' consensus estimates in nine of the last ten quarters. This indicates that financial market participants remain conservative about the commercial prospects of the company's innovative medicines and vaccines despite growing demand for them.
Moreover, in the third quarter of 2023, the company pleased investors with several drug approvals in China, the US, Japan, and Europe. Also, its product candidates have met endpoints in phase 3 clinical studies, ultimately increasing the likelihood that regulators will approve their label expansions.
Author's elaboration, based on quarterly securities reports
On January 31, 2024, the British pharmaceutical company will publish its financial report for the fourth quarter of 2023. According to Seeking Alpha, GSK's revenue for the quarter is expected to be $9.24 billion to $9.79 billion, slightly below analysts' consensus estimates for the previous quarter.
Author's elaboration, based on GuruFocus and Seeking Alpha
At the same time, according to our model, GSK's total revenue will be above the median of this range and reach $9.82 billion. The company's year-over-year revenue increase will be driven primarily by continued double-digit growth in sales of its oncology products, Shingrix, Arexvy, Nucala, and HIV medicines.
Created by author
Even with increased R&D expenses in recent quarters and a $1 billion agreement with Johnson & Johnson (JNJ, Financial) to transfer exclusive rights to further develop and commercialize JNJ-3989 to GSK, we expect its operating income margin to continue to grow year-on-year and reach 25.5% for 2023.
Simultaneously, this financial metric will rise to 27.6% by 2024, mainly due to the expansion of the company's portfolio of medicines and vaccines, lower costs of raw materials needed to produce its vaccines, and increased demand for its key products such as Nucala, Dovato, Juluca, and Trelegy.
Q3 2023 results slides
According to Seeking Alpha, GSK's fourth-quarter EPS is expected to be $0.71. On the other hand, we expect its EPS to be higher at $0.81, up 26.6% year-over-year.
Author's elaboration, based on GuruFocus and Seeking Alpha
Besides, GSK's Non-GAAP P/E [TTM] is 9.31x, 46% lower than the sector average and 44.71% lower than the average over the past five years. Meanwhile, the Non-GAAP P/E [FWD] is 9.3x, which is one of the factors indicating that financial market participants undervalue the company despite its extensive portfolio of product candidates and significant revenue growth in its HIV division.
Conclusion
GSK is one of the world's largest pharmaceutical companies, specializing in developing and commercializing medicines to combat HIV and respiratory diseases.
Despite the impact of the two risks we highlighted at the beginning of the article and also increased competition in the global influenza vaccine market, GSK's share price has declined only slightly since the beginning of 2023.
Author's elaboration, based on GuruFocus
Conversely, the company's growing margins, increasing its financial guidance, lower total debt year-over-year, and its aggressive R&D and M&A policies allowing it to expand its portfolio of experimental drugs faster than many of the largest pharmaceutical companies are some of the crucial investment theses that make GSK an attractive asset for long-term investors.
We continue our analytics coverage of GSK with an "outperform" rating for the next 12 months.
