Have Glaxo shares run out of steam?

Shares in GlaxoSmithKline have lost ground since Unilever PLC decided not to up its bid for its healthcare arm, falling back to 1660p and, having rejected the food producer’s widely unpopular offer of £50bn, the company will now have to prove it was justified in doing so.

CEO Emma Walmsley plans to spin out the healthcare business later this year, part-owned with Pfizer Inc (All Sessions). The other part of the business – its biopharma arm – will be known as the ‘New GSK’.

Bid booster

The shares are up 20% since last January, boosted by favourable market sentiment for big pharma during the pandemic and three unsolicited bids from Unilever for Glaxo’s healthcare division. The shares hit 1707p during the height of the bidding drama but have fallen back after Glaxo rejected Unilever’s advances.

GSK’s full-year results are due on 9th February and it intends to give earnings guidance to analysts for the ‘New GSK’ alongside these. Plus, a capital markets day is also planned for 28th February.

Pipeline pain

Like other big pharmaceutical firms, GlaxoSmithKline is still trying to find its way after sales from past blockbuster drugs have waned amid expiring patents. CEO Emma Walmsley has been tasked with trying to restock its previously lacklustre pipeline. Plus, although it is developing Covid-19 vaccines with Sanofi, it is also considered by some critics to have fallen behind in the vaccines race.

The drug giant told analysts last week that sales for the full year will be hit by currency movements (down 5%) and unveiled a mixed bag of anticipated results. Established pharma sales are expected to be down in the high single digits for the full-year.

However, pharmaceutical division revenues are forecast to be up 5% for 2021, while HIV sales are strong and rose by 8% in the third quarter, with full-year growth anticipated of 4%. Vaccine sales are also expected to have declined, however sales of Covid-19 adjuvants are buoyant. A deal to supply the US government with Glaxo’s treatment for Covid-19 sotrovimab is also a win.

Break-up pressure

Like its former suitor Unilever, the company faced pressure last year from activist investors at Elliott Management who pushed for a break-up of the firm, and those at Bluebell Capital who demanded CEO Emma Walmsley reapply for her job. However, investors including BlackRock rallied behind the pharma giant and its strategy.

Future success will depend on the success of the healthcare arm spin-out due later this year and how the drug pipeline fares at New GSK. Adjusted earnings per share are expected to dip by between 2% and 4% at constant currency rates this year, excluding Covid-19 solution sales, but Walmsley expects the New GSK to deliver sales growth and adjusted operating profit growth of more than 5% and 10%, respectively, at constant exchange rates between 2021 and 2026.

Analysts at Liberum think shares are undervalued and the new biopharma business underappreciated. They believe the shares could hit 1700p, while analysts at Deutsche Bank have set a price target of 1350p and rate the shares a hold.

Glaxo’s shares have disappointed for years but were worth holding for the generous dividend yield. This will be cut post the demerger and it’s difficult to see what might boost the share price further short term, unless something interesting emerges from the capital markets day.

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