BREAKINGVIEWS-GSK drug pipeline requires bigger cash injection

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Aimee Donnellan

LONDON, Feb 25 (Reuters Breakingviews) - Emma Walmsley is in search of a booster shot for $77 billion GSK’s GSK.L valuation. A misfiring vaccine business and looming patent cliff are weighing on the UK drugmaker’s stock. The best hope of a revival is to mimic more successful rivals by investing more in dealmaking and research.

GSK has a long history of disappointing investors. The London-based pharmaceutical group for years underinvested in its drug pipeline and prioritised dividends and buybacks instead, leading to a lacklustre valuation. This questionable strategy eventually caught the attention of activist investor Elliott Investment Management, which even called for Walmsley to step down in 2021. She survived the campaign and recently set ambitious growth targets. By 2031, she reckons GSK can deliver $50 billion of sales, compared with about $39 billion last year.

Yet investors are valuing the business as if Walmsley will continue to disappoint. GSK trades at 9 times forecast earnings this year, a steep discount to rivals like Sanofi SASY.PA, Novartis NOVN.S and AstraZeneca AZN.L, whose forward price-earnings multiples are 12, 13 and 16 respectively.

There are many reasons for Walmsley’s discount. Revenue in GSK’s vaccine business, which makes up nearly a third of the group’s total sales, declined 3% last year. And there’s no sign of a recovery as Walmsley expects vaccine sales to fall by a “low single-digit” percentage in 2025. Meanwhile, the company’s patent for its star HIV medication will expire in 2028, meaning rival drugmakers can offer cheaper generic versions of the same treatment.

Then there’s the buyback. Earlier this month, Walmsley launched a $2.5 billion share repurchase plan. While there’s logic to buying stock at discounted levels, in GSK’s case it has disconcerting echoes of the past, when the company sacrificed drug development in the name of shareholder returns. Investors may also fear that Walmsley’s buyback signals a lack of growth-boosting M&A ideas.

A better treatment for GSK’s sickly valuation may be to focus on the drug pipeline instead. Admittedly, Walmsley is already investing. But she’s targeting crowded sectors like oncology, which are already dominated by much larger pharma groups like Roche ROG.S and AstraZeneca.

And while GSK has increased its research and development (R&D) spending in recent years, it’s still lower than more successful rivals like AstraZeneca, as a proportion of sales. Last year, Walmsley only spent 20% of the company’s revenue on R&D. Compare that with $231 billion AstraZeneca and $835 billion Eli Lilly LLY.N, which both regularly invest over 25% of their sales into cooking up new treatments for conditions like cancer and heart disease. Mimicking them may be Walmsley’s best shot at curing her ailing share price.

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CONTEXT NEWS

GSK launched a 2-billion-pound share buyback plan on February 5 and lifted its long-term sales target to nearly $50 billion.

Hedge fund Citadel made a 305-million-pound short-selling bet against GSK, according to a February 14 report in the Financial Times.