Financial forecasts raised for a second time this year; share price still becalmed. If she didn’t have last year’s bumper £12.7m pay package to cushion the blow, one could sympathise with Emma Walmsley, chief executive at GlaxoSmithKline.
The multi-year overhaul of the pharmaceutical firm on her watch seems finally to be delivering the operational goods but the share price, down 2% at £15.12 after Wednesday’s half-year figures, is stuck roughly in the middle of the £13-£18 range that has been GSK’s lot for the past decade. The main explanation is that every time a break-out looks to be in prospect, something crops up.
For the past two years, US litigation over Zantac, the heartburn drug that powered the rise of old Glaxo in the 1980s and 90s, has dominated the narrative. The latest setback (from GSK’s point of view) was a ruling from a Delaware judge in June that allowed plaintiffs, who claim that the drug is linked to their cancers, to take their case to jury trial. Until that point, investors had gradually been becoming more confident that GSK and the other pharma companies that sold and marketed the drug (which all dispute the links to cancer) would contain liabilities and legal costs to easily absorbed sums. But Delaware represents the vast bulk of Zantac cases; it is the biggie.
The additional mini-damper last month was the decision by US health officials to narrow the age range for use of new vaccines for respiratory syncytial virus (RSV) for older adults, a market where GSK has the leader, Arexvy. That unexpected move knocked a pound off the share price at the time.
It also gave the market an excuse to pick holes in Wednesday’s upgrade to its sales and profit forecasts for 2024. Within the overall improvement, vaccines – the bit investors were getting excited about – were forecast to have lower growth in sales this year because of the RSV setback.
But this does all feel like an overly gloomy way to view the new-style GSK. For starters, it’s still possible that US officials, who merely postponed a decision on RSV usage while they awaited more evidence, could turn more positive. As for Zantac, there is a fair argument that bad news, plus a bit, is already in the price. Citi’s analysts wrote recently that the share valuation implies an eventual settlement of £7bn, which is more than the rough market consensus of £3bn-4bn (and £2.4bn in Citi’s case).
Meanwhile, an upgrade to profit forecasts is still an upgrade, with a decent chunk coming from newer medicines. GSK, after turning in an 18% rise to £2.5bn in core operating profits in the first six months, now expects a 11%-13% gain over the year. It all adds solidity to the longer-term aim of annual sales of £38bn by 2031 (versus £30.3bn last year), a target that notably does not include anything for Blenrep, a potentially important blood cancer drug that has shown encouraging results in late-stage trials.
Barring a new twist in the Zantac saga, such as the Delaware supreme court revisiting the decision by a lower court, legal clarity probably will not emerge for a year or more, so it is perfectly possible that the stock market will continue to take the view that there are just too many uncertainties at GSK. But the performance on the ground and in the labs appears genuinely to have turned a corner. GSK is not alone in pharmaland in upgrading forecasts, but there is (finally) a glimpse of momentum there.
