Are Haleon shares a defensive FTSE 100 stock pick after half-year results?

Haleon's (LON: HLN) Initial Public Offering only launched on 18 July. The spin-off, comprising assets once owned by GSK and Pfizer, is now the world’s largest standalone consumer healthcare business, controlling global brands including Sensodyne, Panadol, and Centrum.

Debuting at 330p per share, the FTSE 100 company has now fallen to 269p, leaving it with a market cap of just under £25 billion. Carrying £10.7 billion of net debt, Unilever’s rejected £50 billion offer earlier this year may now look a mistake to many long-term investors.

However, CEO Brian McNamara believes the step only the first of an ‘incredibly exciting journey,’ arguing Haleon is ‘strongly positioned’ having generated £9.5 billion of sales in 2021.

Haleon share price: H1 2022 results

Haleon delivered solid numbers in half-year earnings. Revenue increased by 13.4% to £5.12 billion, with Panadol, Theraflu, Otrivin, Advil and Centrum sales ‘particularly strong.’ And two-thirds of its business sectors gained or maintained market share in the half.

Encouragingly, e-commerce sales saw growth ‘in the high teens’ to 9% of total sales. And adjusted operating profit rose by a significant 21.2% to £1.19 billion, while adjusted operating margin rose by 150 basis points to 23%.

McNamara was ‘incredibly proud’ of the FTSE 100 company’s performance, noting that ‘Haleon performed strongly in the first half of the year with double digit revenue growth, importantly with a healthy balance of price and volume/mix reflecting brand strength across our portfolio.’

Looking forward, the company argues that the ‘positive momentum seen in the first half of the year has continued into the third quarter, albeit at a slower rate as expected, underpinning our guidance for FY2022 organic growth of 6-8%.’

And it thinks ‘the business is well positioned to navigate the current macro-economic challenges including rising inflation and the potential impact this may have on consumer behaviour in the future.’

Haleon’s pole position in the consumer healthcare sector could help it weather the wider recessionary environment and associated cost-of-living squeeze.

According to PAGB, the UK trade association for OTC medications and supplements, consumers turned to brands during the pandemic as despite ‘early signs of recessionary behaviours...trust remains an important factor...in the uncertainty of 2020, trusted brands performed better than private label self-care products.’

On financial results, outlook, and its brand portfolio alone, Haleon could be a decent defensive portfolio constituent, especially given its share price correction.

FTSE 100 stock: The Zantac question

However, there is one large question mark hanging over the FTSE 100 company — namely, its legal liability over the Zantac heartburn drug.

Over 2,000 legal cases have been filed in the US over Zantac, with accusations that it acts as a carcinogen. And it has been sold by a plethora of healthcare groups, including GSK and Pfizer. However, Haleon does not believe itself liable for any of the legal claims, having never marketed Zantac in the US either as Haleon or as GSK.

In Haleon’s results, it told investors it ‘has notified GSK and Pfizer that it rejects their requests for indemnification on the basis that the scope of the indemnities set out in the joint venture agreement only covers their consumer healthcare businesses as conducted when the JV was formed in 2018.’

And in an interview with Reuters, McNamara insisted that even if any lawsuit were successful, Haleon had never agreed to accept a share in the liabilities, emphasising ‘it was important that all our shareholders were aware of that stance.’

The uncertainty over this potential liability has been central to Haleon’s share price fall since its IPO. Similar cases have ended with billion-dollar settlements. At a minimum, Credit Suisse has estimated pre-tax Zantac loss liabilities for Haleon would be around $200 million to $400 million.

For its part, GSK argues ‘we do not agree with Haleon’s position... there are grounds for it to bring indemnification claims in respect of certain potential liabilities, including against Haleon.’

As the battle for liability will revolve across multiple legal grounds, and potentially in two jurisdictions, the outcome for the FTSE 100 stock is far from clear.

But a resolution in its favour could see a sharp recovery.

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