Years of underwhelming pipeline performance and a weak pandemic showing have left Glaxosmithkline one of big pharma’s laggards. Executives now face a massive test at an investor event on Wednesday, at which they will try to reset expectations and convince shareholders about new growth targets.
Investors will essentially be asked to keep the faith in the company's existing strategy, Evaluate Vantage understands. Despite pressure from an activist investor Glaxo apparently remains convinced that vaccines and HIV are integral parts of the pharmaceuticals unit, which will become a standalone business once its consumer arm is cut adrift. The outlook for "new GSK" needs to convince, however, or pressure to make bigger changes could grow.
Glaxo’s stock hit a decade low earlier this year after a series of pipeline misfires, mounting concerns about a lack of new growth drivers and an admission that the company’s dividend was to be cut. This spurred speculation that bigger changes were needed, on top of the spin-out of the consumer unit announced back in 2018.
Analysts at SVB Leerink asked whether vaccines would be better served as an independent company, saying that the division seemed to be an "afterthought" compared with oncology. Then the activist investor Elliott Management amassed a stake in Glaxo and was said to be agitating for change, which was initially thought to refer to big organisational transformation.
Elliott has never made specific demands public, but recent reports have suggested that the fund has backed off from pushing for major restructuring or spin-offs, or for Glaxo to be put up for sale. Post Brexit, the UK pharma giant could expect substantial support from a Conservative government keen to retain large, multinational businesses with deep roots in the country.
Investors who spoke to Evaluate Vantage said that, for now, there is support for Glaxo to keep the fast-growing vaccines business and incredibly profitable HIV arm – the Viiv joint venture owned with Shionogi and Pfizer. This is largely because what would be left would have a very low valuation.
Activist investors could have another target in mind, however: Emma Walmsley, who has been chief executive for four years. While it could be argued that she inherited a weak pipeline, Glaxo’s poor pandemic response happened on her watch; criticisms have also included the slow pace of the consumer spin-out.
Exactly how the consumer unit will be separated will be a major focus this week, with either a demerger or IPO – or some combination of the two – likely. And, while many investors will hope for a windfall, the company will also be keen to generate as much cash as possible, to help rebuild the pharma unit's pipeline.
As such, the depth of the dividend cut is also keenly awaited, with some analysts estimating that the payout could effectively be slashed in half next year. While this is disappointing to investors who rely on such regular payouts, others accept it as necessary pain to buy in future revenue streams.
Confidence in Glaxo’s ability to pick the right assets has been dented by the pipeline misfires, however, which have largely happened in oncology. The company has been scrambling to get back into this therapy area after selling off its cancer drug portfolio to Novartis in a 2014 asset swap.
Glaxo insiders admit that the group is struggling to make a mark in oncology, and that much needs to be done – or bought – before it can be considered a big player. The internal defence of the Novartis deal is that the franchises sold off were coming to the end of their patent life and what Glaxo got in return was of much higher quality.
But cancer is an intensely competitive area where asset prices are high. Even if the consumer sale leaves Glaxo’s pharma rump with more firepower, buying a slice of the action will not come cheaply.
On Wednesday the company will be pointing to other products that it believes can revive growth. The spectre of patent expiries adds to the pressure here, with several drugs due to fall to low-cost competition towards the end of this decade. The biggest of these is the HIV drug dolutegravir.
Dolutegravir is hugely profitable, but this will be lost in 2027. Investors are not convinced that Glaxo has the pipeline to overcome that patent cliff, a problem that will only become starker once the pharma unit stands alone. Executives have their work cut out to change this view.