{ "docId": "019f6b8f-1354-774d-98d0-be219b0f6eb3", "docSlug": "jarvis-elliott-management-gsk-letter-july-2021", "documentTitle": "Elliott Management GSK Letter July 2021", "authorId": "elliott-management-gsk-letter-july-2021", "authorName": null, "documentKindSlug": "document", "documentKindLabel": "Document", "sourceTypeSlug": "independent_analyst", "sourceTypeLabel": "Independent analyst", "presentationDate": "2021-07-01 00:00:00", "orientation": null, "aspectRatio": null, "pageNumber": 15, "pageCount": 19, "prevPage": 14, "nextPage": 16, "slideType": "appendix_disclosure", "function": "analyze_data", "density": "overcrowded", "nDataPoints": 8, "notes": "Contains detailed valuation methodology and assumptions for both business units.", "elementsJson": null, "metadataConfidence": 1, "imagePath": null, "slideHref": "/slides/019f6b8f-1354-774d-98d0-be219b0f6eb3/15", "deckHref": "/decks/019f6b8f-1354-774d-98d0-be219b0f6eb3", "deckJsonHref": "/decks/019f6b8f-1354-774d-98d0-be219b0f6eb3.json", "deckAnchorHref": "/decks/019f6b8f-1354-774d-98d0-be219b0f6eb3#slide-15", "components": [ { "bbox": { "h": 0.055, "w": 0.764, "x": 0.118, "y": 0.765 }, "kind": "disclaimer", "text": "14 10% synergies represents ~40% of CH's EBITDA, thus creating significant value to be shared between buyer and seller\n15 Peers comprise AMGN, MRK, JNJ, PFE, AZN, NOVN, BMY, SAN, NOVO, ROG (LLY excluded given outlier)\n16 Assuming 7.5% WACC and 1.0% terminal growth rate, in line with sell-side analyst assumptions", "attrs": null, "subkind": "source-note", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "9d70d741-6303-4dc8-a1a3-12867cbf3dc6", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.042, "w": 0.764, "x": 0.118, "y": 0.134 }, "kind": "paragraph", "text": "GSK's opportunities to improve will not only create a better business, but they will also create significant value for shareholders, including employees, pensioners and other individual shareholders.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "177dfbb3-d5c8-4a62-9c1c-06b6ea02bf92", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.042, "w": 0.764, "x": 0.118, "y": 0.191 }, "kind": "paragraph", "text": "GSK's wise decision to separate into two strong businesses will be a key driver in unlocking that opportunity. Given that imminent separation, we believe each business should be valued on its own merits, as they will be separate companies shortly.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "218106b7-83fd-4f58-80ce-ac7805295b31", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.215, "w": 0.764, "x": 0.118, "y": 0.478 }, "kind": "paragraph", "text": "A method of valuing biopharma businesses is to use a regression of top line growth vs. valuation multiples, given the high correlation observed between these variables. Assuming a conservative top-line growth of ~6%, which ties in with management's recent divisional growth guidance (Vaccines at a high single digit rate, Specialty Medicines at a double digit rate and General Medicines flat), our regression suggests an appropriate valuation multiple for New GSK of ~12x EBITDA,15 equivalent to ~£100 billion. This multiple is particularly reasonable given GSK's high relative exposure to vaccines, which comprise ~38% of New GSK's EBITDA (vs. <20% for peers with vaccine exposure), and which is a highly durable business that deserves a valuation premium over pharma. This approach yields a valuation below our bottom-up, asset-by-asset discounted cash flow valuation of ~13x EBITDA.16", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "25797940-32e1-4f46-a146-9b2ed21d24f4", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.042, "w": 0.764, "x": 0.118, "y": 0.708 }, "kind": "paragraph", "text": "The combined valuations of CH and New GSK suggest the Company is materially undervalued by the market today, with a potential 45% share price upside for investors even before any early-stage pipeline materialises. This upside could increase meaningfully if a sale of CH materialises at a", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "32441b77-0f9b-41c4-82aa-c560b7d539b7", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.215, "w": 0.764, "x": 0.118, "y": 0.248 }, "kind": "paragraph", "text": "Many pharma analysts (who cover GSK today) value Consumer Health on a multiple of EV/EBITDA; they assume that CH will trade roughly in line with consumer peers that grow sales at 3%-5% per year. This approach implies a valuation of ~£30 billion for GSK's stake in CH. However, we believe that upon the separation, consumer-focused investors and analysts will value CH based on the industry-leading calibre of the business and using a P/E multiple, which is how consumer businesses are more typically valued; on this basis, GSK's stake in CH could be valued closer to ~£38 billion. We believe that the consumer view of the business will prevail upon separation but conservatively using the average of these two approaches yields a valuation of ~£34 billion. Additionally, there is significant potential upside from a merger between CH and another strategic player, with synergies of up to 10% of target sales driving a potential take-out valuation at a meaningful premium to our base case valuation.14", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "9f7a0ca3-9dd1-4a26-81ff-f77214e64430", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.018, "w": 0.465, "x": 0.118, "y": 0.093 }, "kind": "title", "text": "Appendix III: A Stronger GSK is a More Valuable GSK", "attrs": null, "subkind": "headline", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "531fb069-6b39-4c86-9e99-0138dd3eb0fc", "frameworkName": null, "frameworkSlug": null } ], "metrics": [], "tools": [], "frameworks": [ { "name": "dcf", "slug": null, "matchId": "a63387a0-8960-4477-a7a2-8172e41984d3", "evidence": "mentions discounted cash flow valuation", "confidence": 0.8 } ], "arcBeats": [], "loops": [], "imagePathAlt": null, "thumbSrc": null, "thumbSrcAlt": null, "locked": true }