Is Everything So Wrong at GSK?

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British pharmaceuticals giant, GSK, one of the UK’s largest companies by market capitalization, is once again finding itself under the spotlight as analysts and shareholders alike continue to query the long-term business strategy of the iconic drug maker.

 

Until relatively recently, the drug developer had made a point of swimming against the tide by pursuing large-scale diversifications.  For instance, GSK had bolstered its vaccines division and branched out into low-margin consumer health products such as toothpaste and nicotine patches at precisely the juncture when much of the rest of the industry had been consolidating to form high-performance pure play outfits. This, in turn, had attracted a welter of criticism from sections of the investor community.  Star hedge fund manager Neil Woodford notably likened the behemoth to “a lumbering morass of four FTSE 100 companies haphazardly bolted together in a way that fails to bring out the best in any of its constituent parts.”

 

Correcting Course

One might, therefore, have expected a much warmer response to CEO Emma Walmsley’s recent efforts to change tack and demerge the consumer healthcare business. Certain quarters, however, seem not ready to be appeased quite yet. Activist hedge fund, Elliot Management, which acquired a multi-billion-pound stake in the company back in April, for instance, has lambasted the mini-conglomerate for “chronic share price underperformance and years of under-management.” The so-called vulture fund has been vigorously agitating for a reshuffle of the top team:  namely the “appointment of fresh independent directors with considerable biopharma experience” capable of steering a standalone speciality medicines portfolio and late-stage innovative drugs pipeline.

While Elliot Management backs the separation strategy in principle, signs are afoot that the (notoriously aggressive) activist fund is now trying to gin up investor support for a much more radical shake-up of the company’s business model. Not only has the fund openly called for GSK’s board to “diligently pursue strategic opportunities to sell off the consumer health business ahead of the planned spinoff” should any reasonable bids come in for the Sensodyne-to-Advil unit, but the suspicion lingers that they would also like to see the vaccines division hived off as well.

Although certain top investors – namely Blackrock, Dodge & Cox and Royal London – are said to be privately backing Walmsley, others have been far less forthcoming. David Cumming, Aviva’s investment chief even appeared to mirror Elliot’s assessment when he admitted that GSK’s true potential is “currently not being realised.”

 

A Purple Patch

Certainly, the company has been enduring a rather difficult pandemic. Sales for vaccines and pharmaceuticals in 2020 were down three and two percent respectively. One of the star products in the portfolio, Shingrix, a game-changing vaccine against shingles has been hit hard by lockdowns and has yet to match expectations to the point where a full re-launch may well be warranted. GSK has also been notably absent from the clutch of drug makers that have manged to place a Coronavirus vaccine on the market, having opted instead for the much more modest objective of supplying adjuvants to boost the efficacy of vaccines engineered by others. Nor does the pipeline performance make for especially happy reading. Since 2017, GSK has delivered only 11 major product approvals.

 

Turning the Tide

A brighter future may yet lie on the horizon however. Walmsley’s team calculates that a standalone pharma business – christened the ‘New GSK’ – would enjoy projected revenues of around USD 46 billion by 2031 and could be expected to register growth of more than ten percent operating profit over the next five years.

Moreover, a couple of bold moves are being made that could help catapult GSK back into the big league of next gen innovative medicine discovery and development. Firstly, plans are underway to radically expand an existing R&D facility in Stevenage in England: transforming it into an entire ‘biotechnology cluster and campus’ likely to unlock around 5,000 high-skilled jobs within five years and up to GBP 400 million worth of new investment.

Additionally, GSK and American group Alector have announced that they will be partnering for the development of two drugs for the potential treatment of Alzheimer’s and other neurodegenerative diseases in a deal worth USD 700 million. This signals a return to research-driven pharma and a desire to be at the forefront of solving some of the great public health issues of our time.


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