GSK annual results get warm reception 

GSK (LSE:GSK) has issued an update which inevitably reflects the difficulties faced in the last year, while also providing a host of reasons to be more upbeat on future prospects.

Concerns over the group’s Vaccines business, which accounts for 29% of overall sales, have weighed heavily on GSK’s recent share price performance on a couple of fronts. Sales fell by 4% in 2024, as had been anticipated, with particular focus on the shingles vaccine Shingrix, which clawed back a deficit to post a gain of just 1%, and respiratory virus vaccine Arexvy, where sales declined by 51% on lower demand due to a limited recommendation from a US advisory committee.

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In addition, the nomination by President Trump of renowned vaccine sceptic Robert F Kennedy Jr cleared another hurdle yesterday, sending shares of Moderna Inc (NASDAQ:MRNA) lower by 6.5% and adding broader weakness to the sector on the potential for both sentiment as well as fundamental concerns.

Drug development is in any event a time-consuming, costly and risky endeavour, while there is also increasing evidence of litigation for the unintended side-effects of new products. Slowing some of the gains was the hope that the Food and Drug Administration will continue to be wholly responsible for approving the safety and efficiency of future drugs.

However, GSK is far from being a one-trick pony, as evidenced by the performance of a Speciality Medicines unit which is the group’s largest, responsible for 38% of overall sales, where revenue growth of 19% to £11.8 billion provided some welcome relief. Feeding into the promising number were sales growth contributions of 13% from HIV to £7.1 billion, 13% to £3.3 billion for Respiratory/Immunology and 98% to £1.4 billion for Oncology as any number of new products gained profitable traction.

The overall result was growth of 7% to £31.4 billion for group sales, marginally ahead of estimates, boosted by a fourth quarter contribution of £8.2 billion, comfortably ahead of the expected £7.8 billion. Immense cash generation of £8 billion and free cash flow of £3 billion showcased the group’s strength, enabling a reduction in net debt from £15 billion to £13 billion in the period.

In addition, a share buyback programme of £2 billion was announced which should, all things being equal, support the share price as well as proving management confidence in prospects. Shareholder returns were further bolstered by a planned increase to the dividend which takes the projected yield to 4.6%, a clear attraction for followers of the stock.

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The shadow of litigation which follows the sector was also seen for GSK in the period, where operating profit fell by 33% in the 12 months ended 31 December to £4.02 billion, largely as a result of the settlement of £1.8 billion relating to its heartburn drug Zantac. Even so, this should now enable a line to be drawn since the vast majority of cases have been settled, and in any event the concerns had already been factored into the share price.

More promisingly, GSK’s Research and Development efforts are continuing apace, with the current tally of 71 Speciality and Vaccines products in clinical development a promising sign of things to come. Of these, 19 are in Phase III, or late stage which is the final regulatory hurdle before the products get the full green light. GSK has also been making selective acquisitions over the period which heighten its expertise and focus over the suite of its products.

The outlook is relatively upbeat, with turnover growth of between 3% and 5% expected next year, alongside core operating profit growth in the 6% to 8% range. The group’s more recent pipeline progress has also resulted in the sales outlook to 2031 being increased from more than £38 billion to over £40 billion.

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The shares have had a tumultuous time of late in navigating the actual and potential challenges, and have declined by 14% over the last year, as compared to a gain of 12.6% for the wider FTSE100. By the same token, a five year drop of 26% in the price also leaves the shares on an undemanding valuation in historic terms.

Despite the warm reaction to the numbers in opening trade, it seems that a cure for all GSK’s ills may yet be a touch too early to call, with the market consensus of the shares as a hold likely to remain intact for the time being.