Neil Woodford is perhaps the most respected British fund manager of his generation. His record is remarkable, considering that most of his investing wins have been achieved during the post-millennial bear market.
So when he says GlaxoSmithKline (LSE: GSK) should be broken up, people sit up and listen. But is he right?
What a carve-up!
Well, let’s dig a little deeper. I have said in previous articles that Big Pharma’s future is more complex than you think. To be successful in the drugs industry, you need to fight a battle on several fronts, developing chemical drugs, blockbuster biological drugs, over-the-counter medicines, and expanding into emerging markets.
So, in principle, you could break GlaxoSmithKline up. Woodford has talked about four separate companies. Perhaps you could have a company based on patent-expired, low-cost medicines, competing with the likes of Israeli generics manufacturer Teva. You could also have a business focussed on branded, healthcare consumer goods, run along the lines of a Reckitt Benckiser.
The bulk of GSK would take the form of a research-intensive firm with the aim of selling the next drugs blockbuster, say like AstraZeneca. Finally, you would have a company that expands into countries such as Brazil and India, selling low-cost, effective medicines tailored to individual markets. A sort of Hutchison China Meditech.
It seems an attractive idea, but I’m not sure it would yield much value for increasingly impatient GlaxoSmithKline shareholders. I just wonder if this is the type of reflex reaction that most fund managers have when one of their main investments under-performs. Neil Woodford is one of the Big Pharma’s strongest backers, and has poured money into Glaxo, but with little return as yet.
If your investment isn’t broke, then don’t fix it. But if it is doing badly, maybe something does need to change.
The ties that bind
Yet I see a common strand that runs through this company, and which should be enough to bind GSK together. That strand is research. Whether you are developing a generic formulation tailored to an emerging market, a new cold remedy to be sold over the counter, or a high-margin, expensive anti-cancer treatment to compete with the likes of Herceptin, you need to innovate.
This research can take many different forms, and involve a range of expertises, but it is innovation all the same.
I still believe GlaxoSmithKline can perform well, but it has many challenges ahead of it, including the increasingly crowded pharmaceutical marketplace and the growing popularity of generics. But it has to keep on trying.
In my mind, it is not about changing what it is doing. Instead, it is about doing it better.