finance

If GSK thinks toothpaste and HIV drugs should be kept separate, why not just do it?


“I am a change agent,” declared Emma Walmsley, as she unveiled the biggest overhaul of GlaxoSmithKline in the 20-odd years of the company’s life in its current form. The consumer healthcare division will depart via a plain-vanilla demerger next year; shareholders will have to live with a sharply reduced dividend; and “new GSK” will seek salvation for its rotten share price by investing more heavily in its core business of pharmaceuticals and vaccines.

That’s the outline of the changes, but the edges went a little blurry on close inspection. Why will GSK retain up to 20% of its two-thirds stake in a consumer business as a “short-term financial investment”? Possibly because it wants to cling to the comfort blanket of the consumer division’s reliable cashflows a little longer.

That decision hardly shouts confidence. If you believe Sensodyne toothpaste and Panadol painkillers shouldn’t be housed under the same roof as state-of-the-art prescription immunotherapy medicines – an entirely reasonable view – just make it happen in one go. As it is, shareholders have been waiting for the demerger since December 2018, the date of the first announcement.

Still, the two-step plan was the minor part of the grand vision. The bigger question centred on the sales and profits targets for the “new” pharma and vaccines business. Answer: compound rates of 5% and 10% respectively for the next five years. Walmsley also promised that £10bn of cash would be generated in the same period, and said growth would continue after 2026, notwithstanding the loss of a patent on an important HIV treatment.

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By GSK’s recent standards, such growth would count as electric. The numbers were also more bullish than expected, even if investors, inevitably, are being asked to take a lot on trust. The case for optimism is that it took three years for AstraZeneca to convince the outside world it would hit the seemingly ambitious revenues targets it set in 2014 to fend off assault by Pfizer. The gloomier view is that this is GSK, home of false dawns.

That is why, one suspects, the whispering campaign around Walmsley’s position won’t disappear overnight. In theory, it’s far too simplistic to say the chief executive of GSK must be a pure scientist. If Walmsley, whose background is on the consumer side, appoints the right scientists to allocate capital to pharma projects, there shouldn’t be a problem.

In practice, the grumbling won’t stop until the share price improves. It’s picked up 10% since Elliott Management was revealed in March to have taken a “multibillion” stake, but Wednesday’s £14.09, up 1% on the day, is nobody’s idea of a triumph. Various analysts’ sum-of-the-parts calculations put a theoretical value of £20 a share on GSK.

Closing that gap is the challenge for Walmsley. There’s still a year to go until the demerger actually happens, so she has time to build belief in the pipeline and try to excite investors. The wrinkle in the demerger mechanics doesn’t help, but GSK does not need boardroom upheaval right now. Investors should give her a fair hearing.



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