There have been significant developments at FTSE 100 pharma giant GlaxoSmithKline (LSE: GSK) since the departure of long-serving chief executive Andrew Witty last year. Here’s why I believe these developments are positive and why I’d buy the stock today.
Breaking up is hard to do
A number of big institutional investors — including Neil Woodford — became frustrated by Witty’s management of the business. Woodford said: “I have long believed that value could be created for the company’s shareholders if it split itself into separate, more specialised business units … My viewpoint, and that of other like-minded institutional investors, has been heard but ultimately ignored — repeatedly.”
Woodford saw little hope of change under Witty’s successor, Emma Walmsley, who had been boss of the group’s consumer healthcare division. He said she’d been “keen to portray herself as a continuity candidate,” and he reckoned, “the prospect of a Glaxo breakup now looks more remote than ever.” After 15 years as a shareholder, he sold his entire stake in the company.
All change
Woodford will perhaps have been surprised by developments in the less than two years Walmsley has been at the helm. There have been a number of significant announcements this year:
- GSK withdrew from bidding for Pfizer‘s consumer healthcare business, reportedly up for sale for $20bn (23 March)
- Agreed to acquire full ownership of consumer healthcare joint venture (JV) with Novartis by buying out the Swiss firm’s 36.5% stake for $13bn (27 March)
- Agreed to sell Horlicks and other health food drinks to Unilever for $3.8bn (3 December, 8.35 a.m.) and agreed to buy biopharma firm Tesaro for $5.1bn (3 December, 12.02 p.m.)
- Agreed an all-share deal to combine its consumer healthcare business with Pfizer’s in a JV, with Glaxo having a majority controlling stake of 68%, and intending to de-merge and list it as a separate company on the UK stock market within three years (19 December)
The market response was generally positive to the consumer healthcare announcements, but was negative on news of the Tesaro acquisition (the shares ended the day 8.9% down on the morning’s opening price). I tend to agree with City analysts that the acquisition looks pretty expensive for what it adds to Glaxo’s drugs pipeline. Nevertheless, I’m agnostic about the group’s pharma business and prepared to wait and see how it develops.
Great value
I’m very excited about the value unlocking potential of the new consumer healthcare JV and its future de-merger. The business will be the global leader in over-the-counter products and have number one or two market share positions in all key geographies, including the US and China.
I was never as downbeat as Woodford on Glaxo’s prospects as a conglomerate, nor did I rule out Walmsley doing a strategic U-turn on a breakup or partial breakup of the group. Indeed, writing in January this year, when the shares were trading at 1,350p, I went as far as to say that if the company went down the breakup route, “it might just turn out to be the buy of the decade today, at least among the FTSE 100 megacaps.”
Woodford once did a sum-of-the-parts valuation of Glaxo that indicated a potential valuation of £100bn (over 2,000p a share). I’d go along with that as a ballpark figure, and with the shares currently around 1,500p, I see great value. I wonder if Woodford will be tempted to buy back in.