GSK to Spin-Off Consumer Healthcare Business by Mid-2022; Provides Outlook

The global pharmaceutical company GlaxoSmithKline plc (GSK) announced the strategic separation of its Consumer Healthcare business, to be completed by mid-2022. The New GSK will focus on Vaccines and Specialty Medicines. Shares jumped 2% to close at $39.85 on June 23. (See GlaxoSmithKline stock chart on TipRanks)

In 2017, the company resolved to transform its business model and has made significant progress with 11 major product approvals and portfolio changes within the Vaccines and Pharma segments. Those changes have led to annual cost savings of £0.5 billion, and proceeds of £1.4 billion from the divestment of non-core brands.

Emma Walmsley, GSK’s CEO said, “Together, we are now ready to deliver a step-change in growth for New GSK and unlock the value of Consumer Healthcare. With world class capabilities across prevention and treatment of disease, New GSK is exceptionally well positioned to positively impact people’s health and to deliver strong performance and value to shareholders through the decade.”

New GSK Outlook

New GSK’s main focus will be on Vaccines and Specialty Medicines, which are expected to contribute around 75% of the company’s 2026 sales. The company expects to achieve sales and adjusted operating profit growth of 5% and 10% CAGR, driven by solid revenue growth from Vaccines and Specialty Medicines by 2026.

Adjusted operating profit margin is forecast to reach 30%+ through 2026, from the mid-20% range in 2021. While the cost savings target is revised to £1 billion, with the addition of a further £200 million of annual savings from the Separation Preparation or Future Ready program.

Also, by 2031, the company projects sales from New GSK to surpass £33 billion, based solely on New GSK’s current late-stage pipeline.

Dividend Policy

Both the Consumer Healthcare business and New GSK are expected to pay out an aggregate dividend of approximately 55p per share in 2022, which is 31% lower than the expected dividend of 80p per share for 2021.

From 2023, New GSK will resume dividend pay-out of 45p per share and adopt a progressive dividend policy aiming at a 40%-60% pay-out ratio.

Post-separation, cash generated from operations of New GSK is expected to exceed £10 billion by 2026.

Demerger of Consumer Healthcare Business

The new consumer healthcare business will be formed by combining nine global power brands with a major sales presence in the U.S. and China. The portfolio is said to have generated annual sales of more than £10 billion in 2020 and offers strong growth prospects, high cash generation, and shareholder rewards.

New GSK will retain up to 20% of GSK’s holding in the Consumer Healthcare business. The new Consumer Healthcare company will be listed on the London Stock Exchange with ADRs listed in the U.S. The 20% retention is a short-term investment that will be monetized over time. New GSK is also poised to receive a dividend of £8 billion from Consumer Healthcare before the separation.

Analysts’ Views

Following the separation news, Deutsche Bank analyst Emmanuel Papadakis upgraded the stock to a Hold from a Buy rating. He also raised the price target to 1,350p from 1,300p.

Papadakis said the company’s guidance is reasonably credible and modestly surprising on the upside. As per the analyst, positive operational guidance of second half 2021 “diminishes the grounds for remaining explicitly cautious in the short-term.”

TipRanks data shows that financial blogger opinions are 100% Bullish on GSK, compared to a sector average of 69%.

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