Breakingviews - GSK revenue hole raises chances of risky M&A move
Since Walmsley took the helm of the maker of vaccines and HIV treatments in 2017, opens new tab, the company's forward earnings multiple has collapsed from over 12 to less than eight. Spinning off consumer-focused unit Haleon (HLN.L), opens new tab in 2022, opens new tab has only shone a light on the core pharmaceutical group's problems. Analysts currently reckon GSK will rake in just 34 billion pounds of revenue in 2031, according to forecasts gathered by Visible Alpha, which is 15% less than Walmsley's minimum ambition.
One reason is that vaccines, which made up nearly a third of sales in 2024, are potentially under threat from U.S. Health Secretary Robert F. Kennedy Jr., a longtime sceptic of immunisations. Another concern is that Dolutegravir, GSK's star HIV treatment which produced nearly 20% of the company's 31 billion pounds of revenue last year, will lose some patent protection from 2028 in the key U.S. market.
Walmsley has claimed that she can replenish the shortfall with future sales from many of the company's 14, opens new tab promising drugs under development. But despite GSK delivering 13 positive late-stage drug trials last year, investors seem more focused on the disappointments. Last week, the group's shares fell nearly 5% after its blood cancer medication Blenrep faced a regulatory setback on safety concerns in the U.S.
That all explains the appeal of M&A. Since spinning off Haleon, Walmsley has committed over 6 billion pounds to companies that specialise in everything from vaccines to treatments for cancer, lung and liver disorders. She has more firepower. The company will end 2025 with 12.9 billion pounds of net debt, analysts reckon, which is not much more than the average forecast for 11 billion pounds of EBITDA this year, based on estimates collated by Visible Alpha. One common rule of thumb is that public-market investors only start getting antsy when leverage approaches 3 times EBITDA, implying that Walmsley has 20 billion pounds of headroom for M&A.
There are several possible targets. GSK could buy out the 89% of $1.3-billion Wave Life Sciences (WVE.O), opens new tab that it doesn't already own. Another option might be $4 billion obesity drug-focused biotech Viking Therapeutics (VKTX.O), opens new tab, which could bring a foothold in a red-hot market. The risk, however, is that any sellers see GSK as a desperate bidder, leading to a higher asking price. Paying over the odds simply to fill a revenue hole would destroy shareholder value, but it wouldn't be unprecedented in the pharma sector. In GSK's case, it would make an already unhealthy valuation even sicklier. Walmsley's investors will be on high alert.
Follow Aimee Donnellan on LinkedIn, opens new tab.
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