The share price charts above (Source:Reuters) show clearly that GSK, over 5 years or 20 years, has been the least exciting performer in the large capitalization sector (excluding dividends and share buybacks). It is a measure of the degree of frustration felt by some long term and supportive investors that they argue that breaking GSK into several pieces would create more value for shareholders. However, such an event runs counter to the clearly expressed strategy of maintaining a balanced portfolio of pharma, vaccines, HIV and consumer businesses in order to reduce long term sales and earnings volatility. Have investors lost patience with the strategy believing it is not delivering nor will ever deliver what was anticipated? Or do they believe the strategy is not being properly implemented? Either way, it is worth reflecting on other companies that seem to espouse a similar strategy.
Johnson & Johnson, Bayer, Sanofi and Novartis could all be considered conglomerates, having significant subsidiaries within their corporate mix in addition to prescription pharmaceuticals. They have all outperformed GSK, some outperforming their pureplay pharma competitors, so the simple suggestion that conglomerates are inherently less attractive may not hold water. The explanation for GSK’s underperformance presumably lies elsewhere and may be with its product mix.
Looking at the long run of results for GSK’s business units it is not the Consumer Health, Vaccines or HIV franchise that have let GSK down; it is the core pharmaceutical business. An effective withdrawal from the fast-growing diabetes business post-Avandia; a sub-critical mass exposure to oncology, which led to the Novartis swap; an over-dependence on the respiratory franchise at a time of Advair’s pending genericisation; and a disappointing pipeline delivery thus far; all these have left GSK fighting in the pharmaceutical slow lane, for which a commercial switch to Emerging Markets and Japan have yet to compensate.
However, Q3 results show signs of a turnaround, with Vaccines and Viiv taking up some of the slack from US Pharma, while Advair’s volume and price declines so far make respiratory stabilization easier to achieve from a lower
base. This balance demonstrates the strategy is working to some degree but GSK does not yet have mainstream exposure to the fastest growing therapeutic areas and this may take some time. Investors may have to exercise some more patience but calls for a break up are surely not the answer.
The author was a Pharmaceutical Analyst at Lehman Brothers for 23 years as well as being involved with the PharmaFutures projects www.pharmafutures.org but is now writing independently. Stewart Adkins is a Director of Pharmaforensic Limited www.pharmaforensic.co.uk
Stewart Adkins was a Pharmaceutical Analyst at Lehman Brothers for 23 years and was involved with the Pharmafutures projects.