Haleon: The ‘Good Health Lion’


Haleon PLC (HLN, Financial) is the world’s largest consumer health care company, which was recently spun off of GSK PLC (GSK, Finance). The company’s name was formed from merging the words “hale,” which means in good health, and “leon,” which is associated with the word Spanish word for lion. The company will sell well-known self-care brands like Sensodyne, Voltaren, Advil, Panadol and Centrum. Prior to the spinoff, it was combined with the non-prescription drug business of Pfizer Inc. (PFE, Financial) (via a joint venture) as well as that of the consumer division of Novartis AG (NVS, Financial), via an asset purchase.

Consumer health care, also known as the over-the-counter or non-prescription drug business, has always been the poor second cousin of the pharmaceutical industry. At one time, most of the large pharma companies had a consumer health division. While these businesses were typically much less profitable than the patented prescription drug segments, they were reliable contributors to profitability and not prone to the boom and bust cycle of pharmas and subject to patent life.

These businesses are more akin to consumer packaged goods companies rather than the pharmaceutical business, which depend on prescriptions from doctors. Typically, these products are older drugs whose patents have long expired and are targeted toward self-limiting, consumer treatable conditions like headaches, coughs and colds, allergies, heatburn and the like. They are mostly marketed directly to consumers by advertising and promotions. While they are susceptible to generic competition, the competition is mostly from store brands or private labels, which do not inspire the same trust as brand-name drugs.

However, it appears most pharmaceutical companies have decided non-prescription drugs no longer fit with the much more profitable pharmaceutical business, so are diving these reliable cash cow businesses. GSK’s management hopes investors will reward it with a higher price-earnings multiple if the slower growing and less profitable part of the company is dumped.

Investors have also become less enamored with the multidivision conglomerate structure and want pure plays. Rather than relying on diversification within a company, they can diversify among stocks.

GSK is the latest big pharma company to get rid of its non-prescription business to shift its focus to the pharmaceutical (including vaccines and biologicals) business. Johnson & Johnson (jnj, Financial), the quintessential health care conglomerate, is also dumping its consumer business next year. In a similar vein, General Electric (GE, Financial) and 3M (HMM, Financial) are separating their health care businesses from their industrial businesses, looking for greater investor approval and hoping for multiple expansion.

Valuation

Prior to the spinoff, Unilever (UL, Financial) offered a generous 50 billion pounds ($60.83 billion) to GSK for its consumer business. The bid was rejected by GSK, which now looks like it may have been an unwise decision. At the time, GSK said the offer fundamentally undervalued the business, but it looks like the market values ​​it much less. Haleon currently has a market cap of 28.35 billion pounds and an enterprise value of 39.01 billion pounds, which is about 11 billion pounds less than what Unilever offered. If we were to go by the Unilever offer, which includes a premium control, the business looks to be about 20% undervalued.

One big overhang on Haleon’s share price is the GSK and Pfizer ownership. Pfizer retains a 32% stake in the company, which it intends to sell off over time. GSK holds up to 13.5% of Haleon, while the remaining 54.5% is owned by GSK shareholders. Both Pfizer and GSK are expected to sell down their ownership, but until they do so, it will cause the share price to remain depressed.

In regard to the price-sales ratio, Haleon does look like a good value compared to its peers.

ticker

Company

Current

Price

Market Cap

($M)

PS Ratio

UL

Unilever PLC

48.36

123,269.49

2.13

CHD

Church & Dwight Co Inc

87.13

21,167.85

4.09

RBGLY

Reckitt Benckiser Group PLC

16.42

58,794.99

3.55

HLN

Haleon PLC

7.32

33,937.08

2.82

Conclusion

Given Haleon is a relatively new player, we do not have much history to go on. On a quantitative basis, its shares do look undervalued, but given Pfizer and GSK’s ownership, the stock could be driven lower.

On the positive side, it is a reliable, recession-resistant business, though slow growing. If the price-earnings ratio, which around 20, falls below the Peter Lynch line, I think it could work out. There may be a good value opportunity later this year, but the stock is currently on my watch list.

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