GlaxoSmithKline: the future for one of Britain’s favourite stocks

Top brass are fine-tuning their presentation to investors ahead of next week’s strategy update. We examine the likely outcomes and market reaction.  

A new era for GlaxoSmithKline (LSE:GSK) will be launched next Wednesday when boss Emma Walmsley sets out her long-term plans for reviving the under-performing FTSE 100 business.

The three-and-a half hour presentation to investors by Walmsley and her top team is shaping up to be the biggest event in the 21 years since Glaxo Wellcome and SmithKline Beecham merged. Investors are able to watch the virtual investor update at 14:00-17:30 BST by registering here.

Her focus will be on the strategy and growth outlook for “New GSK”, the biopharma business left behind once the company parts with its consumer health joint venture next summer.

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Further details are expected on the separation plan, possibly including whether it will take place through a spin-off or IPO. There's also likely to be more clarity on the dividend policy for both the biopharma and consumer companies.

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Glaxo has kept its dividend at 80p a share since 2014, representing a pay-out ratio of over 80% of this year's consensus earnings per share. That's the highest in its EU peer group, with Glaxo already warning that a new distribution policy will be lower than present.

Analysts at Liberum and Morgan Stanley this week forecast the combined dividend dropping to 45p a share for 2022, which is based on about 10p for the consumer arm and 35p for new GSK. This would be a total pay-out ratio of just over 40%, towards the low end of the peer range.

A dividend cut would help to increase cash flow for biopharma R&D investment, something that investors concede is essential after a recent record of underperformance compared with fellow UK-listed stock AstraZeneca (LSE:AZN).

The underwhelming performance has contributed to Glaxo being one of the worst performing stocks in the FTSE 100 index over the past year, with the company's lack of progress on delivering a Covid-19 jab adding to the disappointment.

Glaxo's non-profit-making collaboration with France's Sanofi (EURONEXT:SAN) is now likely to be ready towards the end of this year, rather than the middle of this year as originally hoped. Shares fell to 1,190p in February, but have since recovered to 1,432p.

The emergence of feared activist investor Elliott Management, which has bought a big stake in the drugs company, has been one factor driving the shares higher.

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Walmsley has also pointed to improving prospects in recent first-quarter results, disclosing that the R&D pipeline now comprises 59 vaccines and medicines, predominantly in the areas of infectious diseases, oncology and immune-mediated diseases.

The company has identified over 20 potential product approvals which could take place by 2026, of which more than 10 could significantly change medical practice and potentially generate peak annual sales in excess of one billion dollars.

Analysts at Liberum have a price target of 1,700p and believe the business is well placed for a five-year period of robust growth, based on its top-end forecast for Walmsley to target a 6% a year rise in sales and earnings growth of 10% a year between 2021-26.

They added: “We anticipate GSK to emphasise the potential of its oncology portfolio, the significant potential for cabotegravir in HIV, and the medium-term growth prospects in vaccines when Shingrix returns to strength.”

Liberum believes it is also “high time” that Glaxo clarifies the exact structure and timeline for the separation of the consumer arm, which is worth about £30 billion. Glaxo owns 68%.

Some analysts have suggested that an IPO is a better route as it would allow Glaxo to raise capital and significantly improve the balance sheet of new GSK and provide greater financial flexibility for investment.

Counterparts at Morgan Stanley said the biopharma arm is gradually evolving into a more innovative, specialist medicines business with potentially higher and more sustainable returns.

The question, however, is whether the pace of change is fast enough: “We believe that new five-year targets could provide upside to consensus earnings in 2026, but incremental progress in innovation and limited long-term visibility suggest GSK could remain a 'show me' story.”

The US bank has a price target of 1,550p.