2020 was a tough year for the GlaxoSmithKline (LSE:GSK) share price. Despite making critical progress in the fight against both Covid-19 and HIV, the pharmaceutical stock dropped to its lowest point in over 10 years. And it’s
What caused the GSK share price to fall? And is this a buying opportunity for my income portfolio?
The business during the pandemic
Despite the disruptions from Covid-19, GSK has actually performed relatively well considering the operating environment.
Overall, revenue from both the pharmaceuticals and vaccines divisions were down by 3% and 2%, respectively. But newly approved products within its portfolio have seen a significant average increase in sales of around 10%. And due to rising demand for hand sanitiser, its consumer healthcare business also achieved notable 12% growth.
These are hardly groundbreaking results. But due to cost-cutting, net income for the year actually increased by 24% to £5.75bn. Consequently, dividends weren’t cut in 2020, and roughly £5bn of debt was repaid.
Needless to say, this is all quite positive. So why has the GSK share price dropped by nearly 30% since the start of last year?
Why is the GSK price falling?
In early 2020, the company announced that its consumer healthcare business will be spun off in a joint venture with Pfizer in 2022. The cost of this separation is expected to be around £2.4bn, with £1.6n being covered by disposals. Given that GSK is still a £60bn company even after the decline in share price, this doesn’t seem too expensive to me.
Once the consumer healthcare segment has been separated, GSK will become a pureplay R&D drug development company. Which, rightfully, has created concern among income investors.
Why? Because as I’ve previously discussed, drug development is a risky business. Creating new medicines is a lengthy process that typically takes up to 10 years. And even after reaching the final phase of clinical trials, there’s still a possibility that a drug won’t receive regulatory approval or become economically viable.
I believe the increased risk profile of the business has undoubtedly contributed to its share price decline. However, the primary catalyst appears to be the fact that the company is going to be much smaller after the split. The consumer healthcare division currently contributes 40% of total revenue and that will disappear after 2022.
Consequently, GSK’s famous 4% average dividend yield is expected to be cut some time in the future, making the stock look far less appealing for income investors.
Is this a buying opportunity?
But the collapse in the GSK share price looks quite attractive to me. Don’t forget that the company isn’t splitting for another year. And so, due to the falling share price, the dividend yield today is now around 6.4%, a payout that’s more than achievable in 2021. At least that’s what I think.
However, once the company has split, it will be significantly different. Developing new drugs is a difficult task, as I said. But the firm already has 20 new products expected to launch between now and 2026. What’s more, 10 of these new drugs are expected to generate over $1bn in revenue each.
To me, GSK looks like it’s transforming itself into a growth stock. And with decades of experience under its belt, this is one business I’d be keen to add to my portfolio.
