The era of the giant pharmaceutical conglomerate, which makes everything from cold medicines to breakthrough cancer treatments, appears to be coming to a close. In its place is an industry increasingly split between the risky – but potentially very rewarding – business of drug development, and the boring work of marketing over-the-counter remedies to consumers.Although the latter category may not come with the glory of a potential blockbuster drug, it will likely prove a steady investment through long-term economic cycles. One such firm is the consumer health group Haleon (HLN), which claims it is aiming to make the “world’s mouths healthier” through brands such as Sensodyne toothpaste.
Haleon was a joint venture between GSK PLC (GSK) and Pfizer (PFE) that included consumer brands acquired from Novartis (NVS). The company was spun out of the pharmaceutical group GSK and listed as a separate company on July 18, 2022, though GSK still owns 10.4% of Haleon. Will Haleon put a smile on investors' faces? Let's take a look.
Haleon Looks Healthy
Haleon’s first-quarter organic sales growth of almost 9.9% surprised Wall Street, since analysts estimated only 5% growth. Management now expects full-year organic revenue growth to come in towards the upper end of its previously stated 4% to 6% range.In comparison, Pfizer – which still owns 32% of Haleon, and eventually plans to sell it all – forecast its turnover would fall by 29% to 33% in the current financial year due to rapidly declining demand for its suite of Covid-19 products. Excluding these items, sales are forecast to grow 7% to 9%. That's not very different than Haleon.History tells us that consumer health is one of only two categories that show resistance to both cyclical economic fluctuations and trading down to cheaper brands. (The other is pet food.)Over-the-counter medicines tend to be bought when people feel ill, and consumers are likely to turn to a trusted brand. Haleon benefits from having a portfolio of highly recognizable brands in all five of their brand categories: oral health (27% of 1st quarter sales), vitamins (14%), pain (24%), digestive (18%), and respiratory (17%). These brands include the likes of Sensodyne toothpaste, Polident, Centrum vitamins, Theraflu, Flonase, Advil, and Voltaren.The strength of consumers’ connection to these brands allows the company to raise prices and maintain profitability, even if the economy slows down. Haleon currently has the second-highest Ebit margin among all European consumer goods companies. Its full-year adjusted operating profit margin in 2022 was 22.8%.
Haleon Prognosis
The consumer health business also tends to offer security in the form of inflation protection. Good companies in this sector, like Haleon, have pricing power - and if there’s persistent inflation (as we've had recently), they can raise prices. That organic revenue growth of 9.9% in the last quarter was largely driven by price increases.In this scenario, the company's cash flow and dividends will go up in line with inflation, or even exceed it.In addition, Haleon is seeking to take advantage of emerging secular trends, such as the growing popularity of preventive medicine, and the increasing shift from prescription to over-the-counter medications.I expect Haleon, supported by its market-leading brand names, to benefit from these tailwinds. Management is also confident. It has signaled this by beginning dividend payments. Its very first dividend payment was $0.0577344 per share.At the current share price, Haleon trades on a forward price/earnings ratio of 19.2 times. It would not surprise me to see it trade at a forward p/e of 25 times within 18 months.The stock is up over 16% over the past year, and 6.5% year-to-date. I believe Haleon is a buy anywhere between $8.50 and $9 a share.
