GlaxoSmithKline (LSE:GSK) shares were the FTSE 100‘s biggest faller on Monday morning. The stock fell following its long-planned demerger and the listing of Haleon (LSE:HLN), with the consumer healthcare spin-off becoming one of Europe’s largest listing in more than a decade.
So why is the share price falling, and does this represent an opportunity for me to buy?
Why is the share price falling?
GSK stock fell after the London-based multinational pharmaceutical and biotech firm’s demerger went live. Investors who had stock in Glaxo will now receive shares in the consumer healthcare company.
Haleon, which is now the largest consumer healthcare business in the world, opened with a share price of 330p, giving it a market value of about £31bn. Is it poised to join the FTSE 100, qualifying it in terms of market-cap by some distance.
As such, GSK shares should be falling by an equivalent value with shareholders reimbursed by the award on Haleon shares. Glaxo is currently down 343p. But with Haleon shares worth 330p, the fall is roughly cancelled out by the Haleon listing.
However, Glaxo has decided to complicate matters for everyone involved by also undertaking a consolidation. The thing is, nobody knows exactly what this consolidation is going to look like. It will take place after close of trading on Monday, returning the share price to roughly the same as before the demerger.
Therefore, valuing GSK shares is quite difficult right now.
Demerger benefits
The demerger has been touted as an opportunity for Glaxo to push forward after a sustained period of underperformance. For years, GSK has operated as a pharmaceutical company with a huge consumer healthcare business trading in a fast-moving retail segment that is largely reliant on marketing everyday products to customers.
Pharmaceuticals is very different. The industry requires years of research and trials before a product is finally brought to market. At which point it is sold not to regular consumers, but to governments and healthcare trusts.
As such, the two businesses are not necessarily well aligned.
The demerger should allow GSK to focus on vaccine and drug development. However, the failure of the firm to make its own Covid-19 vaccine during the pandemic is perhaps a reflection of its underperformance in recent years.
Would I buy GSK shares?
I’d buy Glaxo shares at the current price ahead of what will hopefully be a new era of prosperity for the pharma giant.
There are several reasons for this. Firstly, the demerger has clear benefits for both businesses. But secondly, I’m fairly bullish on pharmaceuticals over the long run. With ageing populations in the West, there is increasing need to invest in lifesaving medicines. It’s all about the prolonging the period of healthy lives.
Moreover, for sometime, GSK has also been undervalued verses its peers although the Haleon spin-off and consolidation makes valuation a little difficult right now. It also boasts a healthy dividend yield around 4.2%.
Supply chain issues and inflation pushing up costs are certainly issues to contend with, but I’m still bullish for a GSK renaissance.
