Glaxo’s growth problem

As assurances that all is well fall on deaf ears, should Glaxosmithkline be thinking more radically?

Investors had feared a dividend cut from Glaxosmithkline, an inevitable consequence of stuttering growth and climbing spending. But confirmation yesterday that this was on the way was still heavily punished, with the stock plunging 6% to three-year lows.

Confidence in the company’s prospects has been dimming for some time, of course, but recent few weeks have seen a string of pipeline setbacks, while Covid-19 has dented demand for Glaxo's biggest product, the shingles vaccine Shingrix. Pressure is growing on the executive team to jump-start the pharma business, which will become a standalone entity in around 18 months’ time.

In the second half of 2022 Glaxo’s consumer health business will finally be spun off, marking the end of a protracted process that was first triggered in 2018 and involved the $18bn buyout of a Novartis joint venture and merger with Pfizer’s OTC division, with numerous divestments and restructurings along the way.

Investors are more concerned about what will be left behind. Vaccines, HIV-antivirals and respiratory products form the backbone of the business, with oncology a more recent foray. It is noteworthy that Glaxo chief executive Emma Walmsley’s biggest impact on pharma has been to re-enter a therapy area that her predecessor, Andrew Witty, chose to exit, a move exquisitely timed for the start of the immuno-oncology revolution.

In a bid to recover from that damaging decision Glaxo has been forced to play catch-up, with moves like the acquisition of Tesaro. The result is a me-too pipeline of oncology offerings that has failed to inspire much belief; this week saw the termination of an Ox40 asset, which followed a misfire by a Merck KGaA-partnered lung cancer project.

The company has promised to paint a clearer vision for the pharma business in June, along with more detailed financial guidance. A look at how equity analysts value the various parts of the business provides some idea what it might look like. 

The search for value: Glaxo's core therapy areas and products
  NPV ($bn) 
Vaccines 57.4
Shingrix 18.1
FluLaval 7.1
RSV projects 1.7
Respiratory  26.5
Trelegy Ellipta 4.7
Nucala 4.6
Advair 4.0
Antivirals 19.7
Triumeq 5.2
Dovato 4.5
Oncology 15.2
Blenrep 5.9
Zejula 4.6
Dostarlimab 2.5
Various incl. GI, derm, OTC brands  11.7
Anti-bacterials 4.8
Augmentin IR 2.8
CNS (legacy epilepsy and depression drugs) 5.5
Immunomodulators 4.0
Benlysta 3.9
Source: Evaluate Omnium.

The above is based on net present values as computed by Evaluate Omnium, derived from sellside revenue forecasts – it is important to remember that analysts do not put numbers against all the assets a company like Glaxo either sells or has in development.

This will be particularly true for the numerous brands sold by Glaxo’s consumer arm, outside the big names like Advil or Tums, so an estimate of the value of the new OTC business is not possible from this analysis. But it does highlight areas of the pharma unit that could be divested.

And those divestments are coming, execs said yesterday, with several pharma brands seemingly on the block. Still, Glaxo has been trying to sell various antibiotics brands for years without success; it is not implausible that larger chunks of the business are now being considered.  

This raises the question: is a much larger rethink needed?

It is easy to see how vaccines could become a standalone business, although the Curevac partnership announced yesterday perhaps makes this less likely. To a large extent the deal can be seen as an attempt to gain a lead in second-generation Covid-19 vaccines, after Glaxo failed to catch the first wave. But it can also be read as a major endorsement of mRNA tech, which “is a proven platform”, Ms Walmsley proclaimed, clearly with an eye on uses for this technology beyond the current pandemic.

So, if vaccines are staying, then maybe HIV should go, and the joint venture with Viiv is arguably primed for a spinout.


But again, antivirals represent a much-needed source of cash generation; the same probably applies to Glaxo’s respiratory division. And the new business will need reliable revenue streams while oncology is built out. 

Executives made it pretty clear yesterday that the future dividend cut was designed in part to fund deal making, and the cancer space seems a likely target. Curevac would presumably have been another desirable asset, had the German government’s stake not prevented such overtures.

Of course Glaxo is not alone in shopping in the cancer space, and deals will neither come cheap nor without risk. In the meantime, investors are being asked to believe in a weak pipeline and a return to growth for Shingrix, which is predicted to happen once Covid-19 recedes later this year.

In the long run, the dividend cut can probably be forgiven if a convincing path to growth is laid out. But the stock's recent performance shows how little confidence exists right now. Time is running out for the executive team to deliver. 

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