After listening to Emma Walmsley, the CEO of GlaxoSmithKline (GSK), at the J.P. Morgan Healthcare Conference on January 11, 2022, I am confident that she and her management team have a plan to drive shareholder value for years to come.
First and foremost, what I like most about Walmsley’s time as CEO is that she has replaced over 85% of the top 125 leaders at GSK. She has also brought in outside perspectives by replacing over 30% of those top 125 leaders with people from outside the organization.
Walmsley has also stated that she intends to split the company into two by the middle of this year. The first will be the “New GSK,” and the second will be a “New Consumer Healthcare” company. What I believe is happening is something very similar to when Abbott and AbbVie split.
The low growth, value segments of the GSK business are being split off into its own company (like what Abbott became), while the growth-oriented vaccines and specialty medicines businesses are being kept under the GSK banner (this is the part of the split that is analogous to AbbVie).
Once the split has been completed, the New GSK has key data readouts in seven of the 11 potential new vaccines that are in phase three of its pipeline including an RSV vaccine for older adults as well as a proof of concept on a new Hepatitis B therapeutic. If even a fraction of these data readouts is good, the value of the stock should increase nicely.
In looking at the recent products of GSK’s pipeline, it has just received US-FDA approval for Apretude, a superior drug that is administered every two months to prevent HIV in at-risk populations. They have also had “key pipeline achievements” made with a potential best-in-class drug (daprodustat) to treat anemia caused by chronic kidney disease.
The last great thing about New GSK’s potential over the next five-to-10 years is that it does not have any drugs coming off patent before 2028 in the U.S. and 2029 in the EU. So there is only upside from its pipeline to factor into their future sales, income calculations, and valuation estimates.
Recent Results and Dividend
GlaxoSmithKline’s stock has been trading between $33.53 (the 52-week low set on February 26, 2021) and $46.86 (the 52-week high set on January 18, 2022).
GSK brought in revenues of $46.1 billion over the last 12 months and net income of $5.9 billion over the same period.
The company has reported fourth-quarter earnings of $0.69 per share, beating analyst estimates of $0.66 per share by $0.03. It has also reported $3.11 in earnings per share for 2021, beating analyst estimates of $2.57 by $0.54 during that period.
GSK currently pays a dividend of $0.61 per quarter. This is a dividend yield of 5.05%; GSK’s dividend has been sporadic, tending to be higher in February of each year and then lower for the next three quarters.
The company has an average balance sheet. It has a current ratio of 0.8, so it has enough current assets on hand to pay its bills for the next three quarters of a year. Walmsley has stated that the split will help “New GSK” further clean up its balance sheet.
When I calculated the stock’s intrinsic value by modeling discounted cash flows, I pegged it at $80.05. I believe that the split, as well as pipeline approvals, will act as a catalyst to drive the price of GSK’s stock up towards the intrinsic value.
Wall Street’s Take
Turning to Wall Street, GSK stock has a Moderate Buy consensus rating based on five Buys, eight Holds, and one Sell rating assigned in the past three months. The average GlaxoSmithKline price target of £1730.77 implies 10.7% upside potential.
Note that the above price target is for the London Stock Exchange ticker; an upside potential of 10.7% on the U.S.-based ticker translates to a price target of roughly $47.15.
Conclusion
Based on the intrinsic value of this stock, the impending split of the company into two distinct entities, and the management team’s strategy to create shareholder value for the next decade and beyond, I am bullish on this stock.
I think that GSK’s plans to focus on vaccines and specialty medicines markets are wise moves that will create quite a lot of value for shareholders over an extended period of time.
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