The Times: What was the cure that returned Haleon to health?

How the consumer drugs company overcame a shock Zantac sell-off, large share overhang and questions over its growth to become a stock market success story

Almost three years on since Haleon became the world’s biggest standalone consumer healthcare company, the Big Pharma companies that brought it to market have now sold out entirely.

Pfizer, the US multinational drugs company, on Wednesday divested its remaining 7.3 per cent stake in the maker of Sensodyne toothpaste and Panadol painkillers for £2.5 billion, including selling £170 million worth of shares to Haleon.

The disposal has brought to an end a series of share placings by both Pfizer and GSK, one of Britain’s two big drugs companies which fully exited last May, since they retained an almost 45 per cent combined stake in Haleon when they spun-off their joint venture in July 2022.

Brian McNamara, Haleon’s chief executive who previously ran the consumer healthcare business at GSK, had cautioned then that it would “take time” for the “overhang” to go.

Since then Haleon has also  overcome a series of other challenges  to leave the top-25 FTSE 100 company trading about a fifth above its initial 330p price in what City sources called a success story at a difficult time for the wider London capital markets.

Shares in Haleon had weakened on their market debut, when senior executives had gathered with the trade secretary and head of the London Stock Exchange at Paternoster Square in the City. And they soon suffered a shock sell-off just weeks afterwards on investor fears over Haleon’s exposure to potentially large liabilities from a wave of US lawsuits against an old GSK heartburn blockbuster — Zantac.

McNamara, 58, in his first job in charge of a big public company, had been away on holiday in Park City, Utah, preparing for a mountain bike ride when he became aware of the share slump. At the time he called it “a ‘welcome to being a CEO of a listed company’” and again urged patience.

With the Zantac threat having now receded, so too have other concerns that weighed on investor sentiment at the listing.

They also included a large debt pile, amassed from £10 billion of dividends to Pfizer and GSK as part of the demerger, doubts over its growth targets because of its unproven status, and a lack of peers to benchmark the company against.

Haleon, based in London, deleveraged its balance sheet ahead of schedule, is now below three times net debt/earnings, and has begun  share buybacks. It has also hit its organic sales growth forecasts of 4 per cent to 6 per cent, and seen other global pharma companies, such as Johnson & Johnson, go on to list their own consumer businesses.

Its portfolio, spanning toothpaste, vitamins and pain relief, is also being refined. The sale of its lip balm brand  ChapStick  and its nicotine replacement therapy business outside the US raised about £800 million combined, and Haleon has invested some funds, increasing its stake in its Chinese joint venture.

The shares, which traded below 250p in September 2022, hit a high of almost 415p this month — before Pfizer sold its residual stake at 385p on Wednesday — a slight discount. The shares closed 2.9p, or 0.74 per cent, higher at 394p on Wednesday.

In an interview with The Times this month, Dame Emma Walmsley, group chief executive of GSK, who had previously led GSK’s consumer business, had said: “It’s a source of great pride for me to see that business going from strength to strength.”

A head of UK equities at a large City asset manager, speaking privately, said Haleon was a “good advert for the UK market”.

“The UK market, which is often seen as less liquid, has absorbed all of the stock that Pfizer and GSK have sold. It’s a good demonstration of the fact that the UK market works perfectly well for many companies and can continue to do so.”

They added: “Haleon itself, though, is a good quality business and that shouldn’t be overlooked. They’ve got an excellent management team.”

Haleon has beefed up its executive team with greater consumer industries experience and the board, led by the chairman Sir Dave Lewis, the former chief executive of Tesco, has also been refreshed as Pfizer’s representatives have stepped down in line with the US company’s sell-down. Non-executive additions include Alan Stewart, a former chief financial officer at Tesco and Marks & Spencer.

As Pfizer and GSK exited, the top of the register has changed too. Alongside the giant US passive funds of Vanguard and BlackRock are City institutional shareholders such as Legal & General and Schroders.

Analysts have also become more bullish on the stock. The number of “sell” ratings has fallen from 13 per cent two years ago to 6 per cent, according to FactSet data. Just over 40 per cent rate Haleon a “buy” and 53 per cent a “hold”.

Iain Simpson, an analyst at Barclays, which has a “buy” rating, said on Wednesday: “It has delivered organic sales growth and that is the single most important metric for consumer staples companies. That has been consistently delivered in or above its 4-6 per cent target range since spin, at a time when a lot of other European consumer staples companies have struggled to deliver topline growth.”

Those at HSBC this month downgraded Haleon to “hold”, calling it a “good story” but saying a further rerating was “tough”.

Scrutiny of Haleon’s listing had been amplified by the earlier rejection of a cash-and-shares offer from  Unilever, valued at £50 billion on an enterprise basis, in December 2021.

With consolidation in the market expected and a recent change at the top of Unilever, analysts at Jefferies recently speculated a return of interest “does not seem improbable”.