Haleon or GSK – which is the better play?

Haleon made its market debut on the FTSE 100 in July last year, having been spun out of assets owned by GSK and Pfizer. Since September both GSK’s and Haleon’s share prices have delivered solid returns for investors, following an autumn selloff in pharmaceutical stocks. However, GSK has started to offload its stock in Haleon, with Pfizer promising to do the same. Should investors be concerned?

When Haleon [HLN] was carved out of assets owned by GSK [GSK.L] and Pfizer [PFE], a consumer health pure play was born. As the maker of Sensodyne toothpaste and Panadol painkillers, the newly born entity benefitted from immediate brand recognition.

Having listed on the FTSE 100 in July 2022, Haleon’s share price got off to a rocky start, and it wasn’t until December that the stock finally broke above its IPO price. Haleon's share price has generated a 10% return for investors since listing, closing Monday 23 May at 339.35p, a notably better performance than GSK’s share price, which has slipped almost 12% in the same timeframe.

GSK had rejected a £50bn offer for its consumer health business from Unilever [ULVR L], saying this “fundamentally undervalued” the business and its prospects. Instead it chose to spin the business out as Haleon.

Today Haleon has a market cap of over £31bn, below what Unilever was willing to pay. However, there are mitigating circumstances. Pharmaceutical stocks experienced a selloff from August to September last year, as legal action over heartburn medication Zantac dragged on sentiment.

Confidence now seems to be returning. Since 5 September Haleon’s share price has gained over 37%, while GSK’s share price has gained over 16%. The rally in pharmaceutical stocks has been helped by the December dismissal of 2,500 lawsuits in the US that alleged a link between Zantac and cancer.

But this month Haleon’s share price has had to contend with a one-two punch of missing earnings expectations and GSK unloading some of its stock in the spinoff. Is this about to limit the potential upside in Haleon’s stock?

GSK unloads stock in Haleon

Year-to-date, Haleon’s and GSK’s share prices have gained 3.7% and 0.6% respectively. Both have performed better than Pfizer’s share price, which has dropped 24% this year.

News that GSK sold 420 million shares, worth around $1bn, in Haleon in the middle of May is unlikely to do much for investor sentiment. The sale was made at a 2.3% discount on Haleon’s share price close of 342.85p on Thursday 10 May.

Fellow stakeholder Pfizer is also reported to have sold shares in Haleon in a “slow and methodical” manner, in an effort to raise cash and reduce debt, according to the Financial Times.

Haleon’s finance chief Tobias Hestler told Reuters that he was not surprised by Pfizer’s decision, as the trading window opens at the same time the company’s results are announced.

“This will happen every quarter from now until they're sold off... this is just what's expected,” Hestler told Reuters.

Haleon’s first quarter profits up but miss expectations

Haleon delivered a healthy dose of profits in first quarter (Q1) results published earlier this month. Earnings came in at 4.2p a share on revenue of £3bn in the first quarter.

Yet the reported quarterly profits fell below market expectations, with Haleon citing “cost inflation and incremental standalone costs”. Analysts had been expecting earnings of 5.24p per share on sales of £2.9bn.

Despite missing expectations, Haleon’s profits were still robust, with the company saying revenue growth this year would be at the upper end of its 4% to 6% guidance.

In Q1 Haleon benefitted from the prolonged cold and flu season, which led to many of its branded treatments flying off the shelves. It has also meant that Haleon has been able to increase prices without affecting volumes.

Headwinds over the next couple of quarters include the prospect that demand will likely dip over the spring and summer months. Additionally, customers might look for cheaper versions of Haleon’s branded medicines should the cost of living crisis continue to drag out.

So is there any upside in the Haleon or the Glaxo share price? Analysts covering Haleon shares have a 360p, 12-month median target, suggesting a 5.9% upside on Friday’s close. GSK’s share price has a 1,575p target, suggesting a 10.6% upside.