GSK (LSE:GSK) shares have held up well in this year’s market turmoil. Furthermore, on 18 July the company demerged its consumer healthcare business so is now purely a pharmaceutical company.
This is important news for investors like me. It changes the way the company is viewed by potential stock market predators in the pharmaceutical sector, and I am always on the lookout for the next likely takeover candidate. Additionally, any capital gain within my Stocks and Shares ISA is tax-free.
Takeover appeal
Before the demerger, GSK was a large mouthful for a possible predator such as Pfizer to swallow. But now GSK is a bitesize treat, with a stock market valuation of just £71bn compared to Pfizer’s £240bn and the even bigger Johnson & Johnson’s £377bn. If the British pound continues to weaken against the US dollar then a takeover would become even more appealing for a buyer.
For a takeover to succeed, the purchase price would likely be far in excess of GSK’s current valuation. Additionally, takeovers and profitable mergers have clearly had a long history in the pharmaceutical industry, e.g. AstraZeneca (Astra and Zeneca), and Glaxo and SmithKline. These giants often grow this way. It may or may not happen, of course, but I feel there is more upside potential than downside to purchasing the shares.
Long-term positives
If a takeover doesn’t transpire then I think the future should still be quite bright for GSK. It hasn’t got much debt as it parcelled this off when demerging the consumer healthcare company (which is now named Haleon). Debt is a hindrance to a company, especially in a time of rising interest rates around the world, but GSK has the capacity to invest heavily in research and development for ongoing success.
GSK is very nicely placed in the field of vaccines, catering for a growing global population. After two years of a Covid-19 pandemic, most world leaders have grasped the importance of having a vaccine that works, and of holding plentiful supplies of it.
GSK’s pharma business is also strong. The company anticipates underlying operating profits to grow at circa 10% per annum.
We’re in a cost-of-living crisis with high inflation across the globe. Some companies will flounder in this environment, since if they raise their products’ prices, their customers may not be able to afford them or just choose not to buy them. But medicines and vaccines are almost an essential purchase, and GSK will likely be able to raise its prices in line with inflation and remain profitable.
Also, in a time of volatility caused by war, pharma is a good defensive sector of the stock market to be invested in.
GSK shares’ negatives
Post demerger, the company’s dividend will be lower than in previous years, so if income had been a priority for me, then there are better options than GSK.
New drugs could fail during trials, and existing patent protections on GSK’s products will eventually expire, which means GSK’s competitors can launch generic versions of its best-selling drugs. So the company has to keep discovering new drugs and manufacturing successful vaccines to prosper.
On balance, however, I am a fan of GSK and have invested in it for the long term.