Illustration by Barron’s Staff; Dreamstime (1)
In January, the United Kingdom pharmaceutical firm
offer of 50 billion pounds sterling, or about $60 billion, to buy its consumer healthcare division, saying the price was too low.
Six months later, the former division is a stand-alone public company called
(ticker: HLN), with a market value of £24 billion, or $29 billion—about half of what Unilever was willing to pay. That gives investors in the GSK (GSK) spinoff a chance to get in at a bargain price—just over $6 for each American depositary receipt, or ADR.
The company is valued at 13.5 times the FactSet consensus estimate for 2023 earnings. That’s a lower multiple than that of other companies selling consumer healthcare products, including
(UL), which trades at over 17 times its estimated 2023 earnings, and
Procter & Gamble
(PG), which trades at 24 times projected earnings.
While Unilever sells ice cream and Procter & Gamble sells toilet paper—among many other products—Haleon is a large-cap, pure-play consumer healthcare firm. Other public pure-play consumer healthcare companies, notably
Prestige Consumer Healthcare
(PBH), operate at a far smaller scale, with market values of less than $6 billion.
That lack of a peer group, and Haleon’s skimpy track record as a stand-alone company, make it more speculative than other consumer products companies. More clarity will come after a few quarters of earnings reports, plus
Johnson & Johnson
(JNJ) planned spinoff of its consumer health division next year. Haleon and the J&J spinoff will make up a new category—newly public consumer health companiesthat spent decades under Big Pharma’s umbrella.
Haleon, which started trading as a separate company in July, sells oral health products like Sensodyne and Aquafresh; over-the-counter drugs, including Advil and Theraflu, and vitamins and supplements, including the multivitamin brand Centrum.
The consumer health sector has attractive attributes. Demand tends to hold up in recessions, and some of its categories have high barriers to entry. In a note in mid-July, UBS analyst Guillaume Delmas estimated that the underlying growth for Haleon’s businesses will be 3.3% a year from 2023 through 2026.
Haleon is set to be a dominant player. Its 2021 sales while still part of GSK were £9.5 billion, or $11.5 billion. That’s less than J&J’s consumer health division, which sold $14.6 billion worth of goods that year, but more than Procter & Gamble’s health division, which sold $10 billion.
A stand-alone consumer health sector is likely to bring more investor attention, and higher valuations for investors seeking steady, though not spectacular, growth as they earn steady income from dividends.
Haleon says that it plans a payout starting in the first half of next year “at the lower end” of 30% to 50% of its earnings. Analysts estimate an annual dividend of six pence a share in 2023 and seven pence in 2024, according to FactSet. Based on Haleon’s recent price of 258 pence, that indicates a dividend yield of 2.3% in 2023.
Some investors have been wary of Haleon in its early days of trading. GSK launched the spinoff with a hefty net debt of £10.3 billion, or $12.4 billion, or four times earnings before interest, taxes, depreciation, and amortization. The company’s goal is to trim that to three times Ebitda by the end of 2024.
That’s not reassuring to Celine Pannuti, an analyst at J.P. Morgan Cazenove with an Underweight rating on Haleon. “For the same multiple, you can buy a company that is not levered,” she says. The high debt could keep the company from making more acquisitions in the short term, according to Pannuti.
Haleon’s chief financial officer, Tobias Hestler, says the company has “very, very strong cash conversion.” He says that Haleon can still do one smaller deal a year, for a brand with annual revenue of $30 million to $100 million, and still meet its debt target. But he says there’s not much large-scale consolidation left to do after the creation of his own company, which pieced together parts of
(PFE), GSK, and
The company has set revenue growth projections of 4% to 6% a year, and Hestler says those rely on Haleon growing only slightly ahead of the sector. “We’ve done that historically, consistently, in our oral health business, where we’ve outgrown the category two to three [times],” he says.
Other potential headwinds are the plans of GSK and Pfizer, which together own roughly 45% of the company’s shares, to sell their stakes. The lockup period lasts until Nov. 10.
Pfizer CEO Albert Bourla says that Pfizer won’t sell recklessly. “We aren’t going to destroy value by doing stupid things,” he tells Barron’s. “It’s not strategic for us, but what is clear is we are going to maximize value.”
GSK said in a statement in June that it would monetize its Haleon shares “in a disciplined manner.”
In early August, a new worry emerged as investors focused on lawsuits over the heartburn drug Zantac. GSK and Pfizer sold over-the-counter Zantac at different times, and Haleon might be required to indemnify the companies if they are found to be liable in the litigation. It’s too early to say whether Haleon will end up having to pay anything, but its shares fell 12.5% over two days when an analyst raised the issue in early August.
More clarity on potential liability will come as trials begin next year. Meanwhile, the uncertainty gives investors a chance to snag a bargain. Haleon is a good bet on an emerging—and recession-resistant—category.
Write to Josh Nathan-Kazis at firstname.lastname@example.org