Glaxo strategy underwhelms as near-term outlook dims

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Installation of a new chairman today at GlaxoSmithKline has been accompanied by another round of strategic gambits as the UK group addresses one of the least compelling near-term outlooks in big pharma.

Where its peers have committed to M&A and new drug development, GlaxoSmithKline’s safer if unexciting strategy underpinned by vaccines and consumer health is not likely to generate the type of growth that wows investors. The reversals of both the planned partial sell-off of its Viiv stake and its share buyback are a sign of a muddle that has caused major shareholders to question how long chief executive Andrew Witty can hold on, as its sector-leading respiratory franchise is expected to be hammered by generic erosion.

Meet the new boss

The outlook is made all the more uncertain by the accession of Philip Hampton to the GSK board chairman’s seat. He has previously chaired UK companies in the midst of turnarounds – the Royal Bank of Scotland and supermarket chain J Sainsbury – so the signal being sent is that the pharma group needs to show some signs that it too can emerge from its current doldrums, caused in large part by the underperformance of respiratory drugs.

Glaxo shares were down 3% to £14.63 in afternoon trading today. News that the group is scrapping its £4bn B-share buyback and instesad giving shareholders a £1bn special dividend was not positive news for investors who want valuations to be propped up, but the lack of a clear path out of its current lassitude cannot inspire much investor enthusiasm either.

The big strategic moves of 2014 were the huge asset swap with Novartis and the proposal to sell equity in the HIV joint-venture Viiv. The latter move was a surprising one in that the HIV unit is the source of its biggest growth driver, Tivicay, so walking that proposal back is not surprising – analysts described it as “selling the family silver” to protect the dividend (Glaxo’s dire results point to need for a strategy re-think, October 23, 2014).

Earlier this year Glaxo sacrificed its oncology division to Novartis in return for the Swiss group’s vaccines division and the formation of a consumer health joint venture. In essence, GSK traded off a high-risk, high-reward business in favour of safer, albeit lower, returns. It has served an important purpose, however, offsetting slumping prescription drug sales as Advair’s market exclusivity and power crumble (Welcome to respirageddon, February 9, 2015). Glaxo now anticipates that US sales of respiratory flagship Advair could drop to as low as $300m in 2020, half the amount suggested by EvaluatePharma’s consensus forecasts.

What vaccines and consumer drugs do not offer is the explosive growth of oncology. Bernstein analyst Tim Anderson wrote yesterday that the irony of the Novartis asset swap was that it happened as GSK’s oncology division was showing signs of significant growth as agents like Votrient, Mekinist and Tafinlar headed toward blockbuster numbers.

Moreover, Mr Anderson noted, oncology is not subject to the sharp price competition that respiratory drugs are right now. All GSK is left with are clinical-stage oncology projects, which cost the company money rather than earning it.

Quo vadis?

A remaining strategic solution would be big M&A, but Mr Witty in the past has resisted this path – he sees the cost of combining two big pharma groups as greater than the benefits (Glaxo-Novartis deals show swaps not mergers are the new normal, April 22, 2014). Biotech valuations, meanwhile, do not make bolt-ons an attractive option.

Still, even if Mr Witty does nothing beyond cost-cutting, Glaxo does not necessarily look to be a bad investment. A promise of an 80p-per-share dividend through 2017 and a return to topline growth in 2016 would make it attractive to conservative investors – Bernstein’s Mr Anderson describes it “at worst a bond with a nice yield of 5%.” The trouble is, he wrote, promised growth has failed to materialise in the past, so "investors have good reason to remain cautious.”

Today’s market reaction seems to reflect that caution.

To contact the writer of this story email Jonathan Gardner in London at jonathang@epvantage.com or follow @ByJonGardner on Twitter

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