GSK Financial Analysis

Analysis Date: 1/24/2025

Business Model

GSK operates across two major segments: Commercial Operations and Total R&D. Commercial Operations, which generates revenue, is further divided into Vaccines, Specialty Medicines, and General Medicines. Revenue is derived from the sales of a broad portfolio of pharmaceutical products and vaccines globally.

Revenue Sources

• Vaccines: Sales of vaccines like Shingrix, Arexvy, and Meningitis vaccines.
• Specialty Medicines: Sales of HIV medications (Dovato, Juluca, Cabenuva, Apretude), Oncology (Zejula, Jemperli, Ojjaara/Omjjara), and Respiratory/Immunology (Nucala, Benlysta).
• General Medicines: Sales of respiratory medicines like Trelegy Ellipta, Seretide/Advair and other established medicines.

Income Statement Analysis

• Turnover decreased by 1.66% compared to Q3 2023, indicating a slight contraction in sales.
• Cost of sales increased by 5.50%, outpacing the decrease in turnover, potentially impacting gross margins negatively if not offset by price increases or efficiency gains.
• Selling, general and administration expenses saw a significant increase of 65.51%, which could be due to one-time legal charges related to Zantac settlement or increased investments in sales and marketing. This substantially impacted operating profit.
• Research and development expenses decreased by 7.37%, which might indicate a shift in R&D focus or improved efficiency in R&D spending. However, it could also signal a slowdown in innovation pipeline investment which needs further investigation.
• Royalty income decreased by 46.15%, suggesting lower returns from partnered products or changes in royalty agreements. This is called out specifically as due to lower Gardasil royalties.
• Operating profit experienced a drastic decrease of 90.30%, primarily driven by the surge in SG&A expenses, likely due to the Zantac settlement charge.

Balance Sheet Analysis

• Total assets decreased slightly by 1.62%, indicating a minor contraction in the company's asset base.
• Total liabilities decreased by 3.50%, suggesting a reduction in the company's obligations, potentially improving financial leverage.
• Net assets and total equity increased by approximately 5.14%, indicating a strengthening of the company's financial position despite the decrease in total assets, likely due to a larger decrease in liabilities.
• Shareholders' equity increased by 4.95%, mirroring the growth in total equity and suggesting increased value attributable to shareholders.
• Non-controlling interests remained relatively stable with a slight increase of 0.54%, indicating minimal change in the portion of equity not owned by the parent company.

Cash Flow Analysis

• Cash generated from operations increased by 19.48%, indicating improved operational efficiency and profitability in generating cash.
• Net cash generated from operating activities also saw a significant increase of 18.28%, reinforcing the positive trend in operational cash flow, after accounting for working capital changes and contingent consideration payments.
• Free cash inflow/(outflow) experienced a substantial increase of 47.57%, indicating a significant improvement in the cash available after capital expenditures, contingent consideration payments, and finance costs. This suggests enhanced financial flexibility.

Capital Allocation

GSK's capital allocation strategy prioritizes dividends, business reinvestment, and debt management. The company declared a Q3 2024 dividend of 15p per share and expects a full-year dividend of 60p per share, reflecting a progressive dividend policy. Business reinvestment is evident in continued R&D expenditure, particularly in Specialty Medicines and Vaccines pipeline. Net debt decreased by £2,193 million, indicating a focus on strengthening the balance sheet and reducing financial leverage.

Management Commentary

GSK on track to deliver 2024 outlooks with further good progress made in R&D.

Strong growth in specialty medicines helped to offset lower vaccine sales and reflected successful new product launches in oncology and HIV, as well as the resilience we have now built into GSK's portfolio and performance.

Our pipeline continues to strengthen with 11 positive phase III trials reported so far this year and we are currently planning launches for 5 major new product approval opportunities next year.

Despite some challenges this quarter, particularly with lower than anticipated vaccine demand and a tough comparator, GSK delivered growth in both sales and core profits in the quarter at CER.

Total operating profit -86% and Total EPS -100% driven by a charge of £1.8 billion ($2.3 billion) in relation to the Zantac settlement

Vaccines sales -15%. Shingrix -7% and Arexvy -72% reflecting ACIP guideline changes, prioritisation of COVID vaccinations in the US and annualisation of Arexvy launch in Q3 2023

Overall Sentiment: Mixed. Management expresses confidence in the underlying business performance, particularly in Specialty Medicines and pipeline progress, and reaffirms the 2024 guidance. However, the significant negative impact of the Zantac litigation on total profitability and the challenges in vaccine sales temper the overall sentiment. The outlook is cautiously optimistic, focusing on execution and pipeline delivery, but acknowledging headwinds in certain segments.

Recommendation

Rating: Hold

Reason for Rating: A Hold recommendation is warranted due to the mixed financial performance in Q3 2024. While GSK demonstrates strength in Specialty Medicines and robust cash flow generation, the substantial negative impact from the Zantac settlement and challenges in vaccine sales create near-term uncertainty. The confirmed 2024 guidance and strong pipeline are positive long-term indicators, but the immediate financial picture is clouded by the one-off legal charge. Investors should wait for more clarity on the resolution of legal liabilities and the sustained performance of growth segments before making a stronger investment decision.

Disclaimer: This report is for informational purposes only and not investment advice. The analysis is based on limited information and subject to change. Investing in securities involves risks, including potential loss of principal. Past performance doesn't guarantee future results. Always conduct your own research, understand the risks, and consult a financial professional before making investment decisions.

Generated on: 1/24/2025, 4:59:31 AM