After several months of encouragement by super investor Neil Woodford for UK-based GlaxoSmithKline (GSK) to break up, GSK’s Andrew Witty says he’d consider it … eventually.
Neil Woodford, of Woodford Investment Management, met in October 2015 with Sir Philip Hampton, the chairman of the board of GSK, urging him to split up the company. Last week, in an interview with Radio 5 live’s Wake up to Money broadcast, Woodford again argued that GSK should break up into various smaller companies, saying that GSK is “like four FTSE 100 companies bolted together” and that it doesn’t “do a particularly good job of managing all of the constituent parts.”
Speaking this week at the J.P. Morgan Healthcare Conference in San Francisco, Witty said he would consider the breakup suggestions, but that any such split wouldn’t happen for at least a year or two. In particular, it would have to wait until the company finishes integrating the changes that came with last year’s Novartis deal.
In March 2015, GSK announced a three-part deal with Novartis (NVS). GSK bought Novartis’s global vaccines business, excluding the influenza vaccines, it created a Consumer Healthcare joint venture with Novartis, and sold its Oncology business to Novartis.
“A number of analysts and investors have been on record as stating their belief that value accretion would be greater if investors had more visibility of the different divisions of the company,” Tara Raveendran, an analyst with Shore Capital was reported saying by The Guardian. “However, any break up wouldn’t happen for at least a year or two, as the company continues integration after its deal last year with Novartis that created market-leading businesses in vaccines and consumer health. … Glaxo has been pursuing a strategy of diversification, in contrast to rivals such as AstraZeneca (AZN) who have decided to focus on smaller, core areas.”
The primary speculation on a GSK breakup has revolved around the company’s consumer-health division. Joe Walters, a senior fund manager and manager of the Royal London U.K. Income With Growth Trust, told BloombergBusiness that GSK should approach the consumer-health division in much the same way it considered spinning off its ViiV Healthcare unit last year.
In May, GSK abandoned that plan, primarily because the company’s HIV medication Tivicay had such healthy sales.
“There’s a lack of visibility on certain areas of the company,” said Walters, “and if some of these were spun out, I’m sure the value accretion would be greater than the current share prices. We would welcome a move by the management to try to add value to the company.”
Other investors have urged GSK to buy out Pfizer (PFE) and Shionogi & Co.’s minority shares of ViiV, as well as Novartis AG’s shares in their consumer-health joint venture. The rationale is that there are so-called “put options” that place limits on GSK’s payouts to shareholders.
Sam Fazeli, a Bloomberg Intelligence analyst, wrote in a note on Monday that although a GSK breakout would increase enterprise value, spinning off its drugs, vaccines and consumer-health units into separate companies would probably not create an increase of more than 10 percent.
GlaxoSmithKline stock has been on a more or less downward trend with some volatility in late summer and early fall. Shares traded on March 20, 2015 for $48.81, dropped on July 27 to $41.60, then popped up to $45.14 on Aug. 10. Shares dropped again to $37.56 on Sept. 29, then rose to $43.53 on Oct. 28. Shares are currently trading for $39.47.
Any hopes of a breakup will likely have to wait. “By bringing these businesses all to real global scale,” Witty said at the J.P. Morgan conference, “it for the first time creates the optionality for potentially different structures down the road. We certainly have a year or two more of work to finish.”
By Mark Terry
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