The trouble with big moments in the market is that the media tends to miss really important events that are overshadowed by more titanic moves.
For instance, we’re still publishing research coming out from earnings week back in mid-July because just so much happened.
For example, one of the biggest debuts in a decade hit the London stock exchange right before earnings week kicked off in earnest and no one really talked about it.
The reason? Well, it was a huge dud. Yes, today we’re talking about Haleon, a consumer healthcare company spun out of London Pharma titan Glaxo-Smith Kline.
The story of Haleon is honestly sort of wild, with a lot of twists and turns and $60 billion dollar deals falling through all over the place.
But the core products Haleon manages are some of the most iconic and widespread over-the-counter medications of all time. Everything from Advil to Orajel.
So, after a few weeks of watching the stock price recover from a disastrous launch, we’re feeling more and more confident that Haleon is a victim of some of the worst executive timing in the last 5 years and is a steal even at its currently climbing price.
We’ll try to make it quick so let’s just get into it below👇
Haleon is a consumer healthcare brand spun out of the larger GSK family.
Glaxo Smith Kline is one of the international OG Pharma titans that’s been around forever.
The biotech and pharma side of GSK has been suffering lately from a mild lack of funding while they absolutely cleaned house during the pandemic manufacturing COVID antibodies.
The sales numbers they saw here convinced shareholders that the brand could use a more focused approach to R&D and management. So, they announced intentions to demerge and form the Haleon family of brands.
Consumer health at GSK was really healthy for the past 5 years — but sometimes investors care more about big shots down the field that can return revenue growth better than 20%.
It’s honestly a solid move that’s good for both companies—usually split-ups like this end up creating more shareholder value. But this is where it gets interesting.
Who Messed up Here?
Haleon was listed at a starting valuation of ~$45 Billion on British exchanges, and that valuation quickly crashed to ~$38 Billion. There are a LOT of macro reasons for a dive that bad, but those are more important for our forward-looking predictions.
But its because that initial listing was instantly seen in contrast to an offer Unilever made to GSK back in late 2021– to buy out the whole catalog of Haleon brands.
The dollar amount of that offer? 61 Billion Dollars
And so, instantly a narrative emerges that Haleon is being either undervalued or overvalued.
Who messed up here? Was Unilever willing to pay way too much to have more monopoly control over the consumer health market? Or did GSK executives mess up by bailing on the offer and waiting 6 more months to take Haleon public?
To answer this, we have to think back to the end of 2021.
Back then, the Fed was still calling inflation transitory and the mild selloff in the NASDAQ was only really starting. Sure, we had concerns about inflation.
But those concerns didn’t really crystalize into an alarm until after Russia’s invasion of Ukraine in February. After that, prices worldwide (and in Europe/ the UK especially) skyrocketed, and the uncertainty that set off devalued European brands (especially consumer brands) that would be sensitive to inflation and rising energy prices.
And those problems only got worse for GSK the further we got into 2022.
Therefore, based on the strength of the core portfolio, we’re relatively certain that GSK messed up by not pulling the trigger on the Unilever deal back in 2021. On an economic timescale, things pivoted from shaky to bad pretty quickly in the last 8 months.
Therefore it’s more likely that Haleon is being VERY undervalued at launch, and even with the stock recovering back to its launch price, that’s still a huge discount compared to the $61 billion, Unilever was willing to throw down to acquire the portfolio.
But let’s check under the hood and make sure these brands are legit just in case.
Only time will tell here, but this news will put sell pressure on these companies and paint LLY in a comparatively positive light. Please note that our other major pharma pick—Merck—also bailed on their drug that treated this potentially bogus Alzheimer’s protein a few years back — so their safe from the fallout from this if it gathers any steam.
Haleon Brand Catalogue:
And Haleon’s brands are a healthcare powerhouse — from Tylenol’s international competitor Panadol & Advil on the pain relief side to Flonase and Thera flu on the respiratory vertical to Centrum and Emergen-C.
Between these, you’ve got some of the best-recognized and profitable over-the-counter medications worldwide (thanks, British empire).
However in the last few weeks, Haleon has experienced some more sell pressure because 3M has announce it will perform a similar spin of it’s consumer health brands due to lawsuits and a lack of revenue.
So the question is: Is all of consumer health in the same boat right now?
And trawling back through a few quarters of GSK releases shows that this really isn’t the case for Haleon.
The only big outlier is respiratory health popping off in Q1 2022 vs Q1 2021 — but this can be explained more by COVID than good business practices. Revenue in winter 2020-2021 was depressed because worldwide people were FAR more likely to be wearing masks in public and to social distance.
While this didn’t eliminate the insanely contagious COVID-19 coronavirus—it absolutely CRUSHED flu and cold season that year.
If you want to lose an hour of your day, feel free to ask our pharma guy about various public health studies that looked into the efficacy of increased masking vs. the overall flu season.
So the main sell pressure on Haleon right now is honestly inflation and supply chain issues. Operating margins were creeping up in the last quarterly results out of GSK and those results probably won’t have enough information about consumer spending shifting into essentials only as inflation puts more and more pressure on most consumers.
The question is simple: Are medicines like Advil and Theraflu seen as essentials to consumers who are getting squeezed out of every conceivable discretionary purchase by rising costs of every single other necessity?
In past inflation, revenue for consumer health hasn’t decreased significantly when other spending has gone down.
Then again, this period of inflation is ESPECIALLY unprecedented and hard to predict.
Haleon’s first quarterly earnings report in September is going to be a HUGE tell — but analysts are confident we’re going to see growth there and especially in Q4 when we start transitioning back into a “traditional” flu and cold season.
So the big question hinges on two points: Has Haleon been undervalued from the start and does the portfolio of consumer brands have room to run regardless?
Frankly, we still believe the answer is yes on both counts.
Haleon will experience some headwinds for the next quarter or two while the world figures out a new global supply chain and energy paradigm, but consumer health tends to be the first segment that recovers from inflationary pressure as consumer spending goes back to normal.
We love the idea of spinning Haleon—and as retail investors we love the timing of Haleon’s launch even more. It’s a great time to for us to jump on this ignored & undervalued ship.
Price Target: $10.80 (35% upside)
Current Price: ~$7.50
Target Date: Q3 2023
Risk / Reward: High / High
Market Cap: $35B
Dividend Yield: 0%