{"id":48202,"date":"2026-05-25T12:03:41","date_gmt":"2026-05-25T12:03:41","guid":{"rendered":"https:\/\/www.europesays.com\/britain\/48202\/"},"modified":"2026-05-25T12:03:41","modified_gmt":"2026-05-25T12:03:41","slug":"our-income-pick-gsk-must-convince-on-earnings-quality","status":"publish","type":"post","link":"https:\/\/www.europesays.com\/britain\/48202\/","title":{"rendered":"Our income pick GSK must convince on earnings quality"},"content":{"rendered":"

Shares in GSK (GSK) fell sharply on Q1 2026 numbers that were positive but afflicted by noise. That was bad news for our Alpha income portfolio<\/a>, which has only just added the shares, but over our time horizon the investment case hasn\u2019t been unmade. \u00a0<\/p>\n

Although there was evidence of underlying operating progress, in its first update since Luke Miels became chief executive, currency exposure and the one-off nature of contributions to the slight earnings beat were a dampener.<\/p>\n

Management estimates the sterling-US dollar exchange rate accounts for up to 8 per cent volatility in GSK\u2019s core operating profit. When the impact of a strong pound is stripped out, at \u00a32.65bn that metric was up 10 per cent on a year earlier, although using actual exchange rates the growth was more like 4.6 per cent.<\/p>\n

GSK reports on a constant currency basis so the GBPUSD \u2018cable\u2019 doesn\u2019t obfuscate positive trends. Although, the fact drug sales weren\u2019t the overwhelming driver of profits is perhaps the most important reason for the market\u2019s unenthusiastic reaction.<\/p>\n

Jefferies analysts point out 50 per cent of GSK\u2019s core operating earnings and core earnings per share (eps) outperformance were the result of one-off legal settlements. Most notably there was a $165mn (\u00a3130mn) boost from the last part of the complex resolution of BioNTech\u2019s acquisition of CureVac, an mRNA vaccine rival which GSK had partnered with and owned a stake in.<\/p>\n

As well as tendering its shares to BioNTech at a premium, GSK also benefitted from BioNTech paying it and CureVac to drop outstanding patent lawsuits. That issue resolved, analysts haven\u2019t seen enough operational evidence that the latest reported year-on-year growth is a fair baseline for the near term.\u00a0<\/p>\n

On the negative side of the \u2018unusual\u2019 item equation for pharma companies, being on the receiving end of litigation is an occupational hazard. Following a $2.2bn settlement in 2024, GSK is casting off the long shadow of its Zantac drug (a heartburn remedy with an active ingredient that became linked to cancer diagnoses). The agreement made nearly two years ago still left around seven per cent of cases unresolved, so there is still a tail risk for GSK although recent favourable rulings in Delaware, one of the jurisdictions where case persist has given cause for optimism.<\/p>\n

Where is the sustainable growth coming from?\u00a0<\/p>\n

While cheer from the legal department is welcome (no pun intended on GSK\u2019s 1990s iteration), investors want good news from warehouses and the laboratory to justify a high rating for the stock. In the case of the former, drugs have been shifting but not at a rate that excites the market.<\/p>\n

Specialty medicines (HIV and oncology) revenues were up 14 per cent (to \u00a33.2bn), although competition appeared to have blunted progress in the market for RSV vaccines (which target respiratory illness in babies and seniors), with sales of GSK\u2019s Arexvy product down 18 per cent to \u00a3100mn. The company preferred to cite seasonal patterns for the disappointment.<\/p>\n

General medicines also underperformed \u2013 sales down six per cent on Q1 2025 was worse than the decline expected by analysts.<\/p>\n

Shingles vaccine Shingrix has been a star of the roster in Q1 2026 with sales topping \u00a31bn and growth particularly strong in Europe. In oncology, Jemperli which treats cancer of the uterus has seen sales rise 40 per cent in the quarter and it has advanced in trials to treat other forms of the disease.<\/p>\n

Of GSK\u2019s most established drugs, the long-acting injectable treatments for HIV have continued to win market share thanks to the efficacy of a single jab over daily combination pills. In Q1 2026 GSK\u2019s two main offerings, Apretude and Cabenuva, kept up their strong record of year-on-year growth.<\/p>\n

The daily oral drug Dovato still accounts for more than a third of HIV revenue, which highlights a risk: the patent for its active ingredient expires in the EU in 2027 and in the US a year later. These are among a handful of looming deadlines which the company will provide more detail on in its broader update in Q2 2026.<\/p>\n

Looking to drugs it hopes will become blockbusters of the next decade, GSK is upbeat on the prospects for Bepirovirsen, its treatment for diseases of the liver. Breakthrough Therapy designation was awarded in the US and acceptance for Priority Review was granted in China, both in April 2026.<\/p>\n

Nothing is certain until a drug clears all its hurdles, so caution is understandable but technological advances in AI could prove material for pipeline efficiency. GSK has made strides with its Cogito Forge AI-powered trialling platform<\/a> which could help accelerate the process of managing a pipeline of 57 medicines and vaccines. The potential benefit of AI is accelerating proof of drugs that work and, also important, enabling the company to drop losers quicker and more cheaply.<\/p>\n

In the longer term that should feed through to efficient working capital management and free up cash for reinvestment and shareholder distributions. That point was central to my case for adding GSK to the Alpha income portfolio<\/a>, and although the share price has taken a pasting this week, I still believe the shares are a good fit for my strategy.<\/p>\n

Commitment to the payout was affirmed (17p per share for Q1 2026 with an ex-date of 14 May) along with guidance of 70p for the full 2026 year, a yield of 3.7 per cent.<\/p>\n

Looking at capital management choices over the past three months, net debt has risen from c.\u00a314.4bn in the 31 Dec 2025 accounts to \u00a315.6bn at the end of Q1 2026. The rise in borrowing has closely matched \u00a31.3bn invested in business development, which includes the purchase of businesses (net of cash acquired) and investment in associates.<\/p>\n

Underlying free cash flow of \u00a31.2bn helped maintain a healthy cash position even as c.\u00a3600mn flowed out in dividends and \u00a3300mn was spent on share buybacks. That\u2019s important for our core investment case in the Alpha income portfolio. We\u2019re aware GSK is no longer a value play; a fair critique of me adding the position is the margin of safety wasn\u2019t enough. But it does have the means and the intent to continue support of its payout.<\/p>\n","protected":false},"excerpt":{"rendered":"Shares in GSK (GSK) fell sharply on Q1 2026 numbers that were positive but afflicted by noise. That…\n","protected":false},"author":2,"featured_media":48203,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":"","_share_on_mastodon":"0"},"categories":[20784],"tags":[21176,21177,20785,21178,703,702,20936],"class_list":["post-48202","post","type-post","status-publish","format-standard","has-post-thumbnail","category-gsk","tag-alpha-weekly-analysis","tag-growth-investing","tag-gsk","tag-income-investing-dividends","tag-standard-article","tag-stocks-shares","tag-value-investing"],"share_on_mastodon":{"url":"https:\/\/pubeurope.com\/@UnitedKingdom\/116635120971355145","error":""},"_links":{"self":[{"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/posts\/48202","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/comments?post=48202"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/posts\/48202\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/media\/48203"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/media?parent=48202"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/categories?post=48202"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/tags?post=48202"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}