Haleon PLC (HLN, Financial) is the world's largest consumer health care company, which was recently spun off of GSK PLC (GSK, Financial). 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), via an asset purchase.
Consumer health care, also known as the over-the-counter or non-prescription drug business, has always been the poor cousin of the pharmaceutical industry. At one time, most of the large pharma companies had a consumer health division. While these businesses are 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 not subject to patent expiry.
These businesses are more akin to consumer packaged goods companies rather than the pharmaceutical business, which depend on cutting edge science, patents and 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 and faster growing pharmaceutical business, so are divesting these reliable cash cow businesses. GSK's management is betting investors will reward it with a higher price-earnings multiple if the slower growing and less profitable part of the company is dumped and they focus more on their core operations.
Investors have also become less enamoured with the multidivision conglomerate structure and want pure plays. Rather than relying on diversificantion 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), the quintessential health care conglomerate, is also exiting its consumer business next year. In a similar vein, General Electric (GE) and 3M (MMM) 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 ($60.83 billion) to GSK for its consumer business. The bid was rejected by GSK, which now looks like it may have been an unwise decision. At the time, GSK said the offer fundamentally undervalued the business, but it looks like the market values it much less. Haleon currently has a market cap of 28.35 billion pounds and an enterprise value (which includes debt) of 39.01 billion pounds, which is about 11 billion pounds less than what Unilever offered. If we were to go by the Unilever offer, which includes a control premium, the business looks to be about 20% undervalued. As part of the demerger process (and price of freedom) GSK extracted a dividend of more than £7 billion from Haleon and Pfizer received a dividend of more than £3 billion, for which Haleon took on debt.
One big overhang on Haleon's share price is the GSK and Pfizer ownership. Pfizer retains a 32% stake in the company, which it intends to sell off over time. GSK holds up to 13.5% of Haleon, while the remaining 54.5% is owned by GSK shareholders. Both Pfizer and GSK are expected to sell down their ownership, but until they do so, it will cause the share price to remain depressed. The lock-up period ends on Nov 10, 2022, after which GSK and Pfizer are free to sell their shares. I expect them to sell out fairly quickly after than and redeploy the capital in their core business.
Looking at the price-sales ratio, Haleon does look like a good value compared to its peers.
| Ticker | Company | CurrentPrice | Market Cap($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 and pending divestment, the stock could be driven lower by selling pressure. Longer term I think Haleon may itself be in play for a takeover by a larger CPG company or by private equity.
On the positive side, it is a reliable, recession-resistant business, though slow growing. If the price-earnings ratio, which around 20 now, falls below the Peter Lynch line (PE = 15), I think it could work out. There may be a good value opportunity later this year, and the stock is currently on my watch list.
