The GlaxoSmithKline (LSE: GSK) share price made further gains in April after activist investor Elliott Management took a multi-billion-pound stake in the group. The FTSE 100 pharma giant’s share price is now up by more than 12% from the lows seen at the start of March. However, the GSK share price is still 20% lower than it was a year ago.
Today’s first-quarter results revealed an 18% slump in revenue, which dropped to £7.4bn for the three-month period. Management confirmed existing guidance for a fall in profits in 2021. However, the outlook for 2022 and beyond looks much stronger to me. I think Elliott may be right to sense an opportunity here.
The wrong kind of vaccines
GlaxoSmithKline is one of the world’s largest vaccine producers. But the company’s Covid-19 vaccine wasn’t an early success and hasn’t yet made it into production. That’s not a big problem in itself — many new medicines are unsuccessful.
What is a problem for Glaxo is that many regular vaccination programmes have been put on hold while Covid-19 vaccination has been prioritised. As a result, revenue from vaccine sales fell by 32% to £1.2bn during the first quarter of this year. Sales of Shingrix, the company’s shingles vaccine, were down by 47%.
I’d guess that many of these routine vaccinations will be made later this year, rather than being skipped. But one area that’s unlikely to catch up is the consumer healthcare division, where sales dropped 19% to £2.3bn during the first quarter.
A winter of social distancing and lockdown means that fewer people than usual had colds and flu. This hit sales of popular over-the-counter medicines. GSK says that sales performance also suffered because consumers didn’t stage a repeat of last year’s first-quarter panic-buying.
2022 looks better
These numbers certainly aren’t great. But three months is a short period of time for any business. GSK’s share price hasn’t moved following today’s results. This suggests to me that the numbers are as expected and that the market is looking ahead.
Management guidance certainly seems more positive for next year. CEO Emma Walmsley said that “meaningful improvements” are expected in both sales and profit margins. Analysts’ forecasts ahead of today’s results show revenue rising by 5% in 2022, with pre-tax profit rising by 12%.
These forecasts price the stock on 12 times forecast earnings, which looks affordable to me.
GSK share price: my view
It’s not yet clear what Elliott Management wants to change at Glaxo. Since taking charge in 2017, Ms Walmsley has increased spending on new drugs and begun preparations to separate the group’s consumer healthcare business. This is due to take place next year.
As a shareholder, I’m happy with this strategy. I’ve only got two real concerns. The first is that rebuilding the pipeline of new products might take longer and cost more than expected. This could be a long-term drag on the stock.
My other worry is that the total dividend is expected to fall next year, but the company hasn’t said by how much.
Ms Walmsley has promised to provide more detail on the firm’s strategy and outlook in June. In the meantime, I think GSK is doing the right things and is probably cheap. I’m not sure if GSK’s share price will climb much higher in May. But on a five-year view, I’d feel comfortable buying the shares at current levels.
