Prescription for Glaxo: A New Boss?

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Incoming Chairman Of GlaxoSmithKline Plc Philip Hampton

Incoming Chairman Of GlaxoSmithKline Plc Philip Hampton, is no stranger to big challenges or high-profile roles. He led the board at Royal Bank of Scotland Group Plc after the biggest taxpayer bailout in U.K. history. Photographer: Jason Alden/Bloomberg

Philip Hampton is taking over as chairman of GlaxoSmithKline Plc as Chief Executive Officer Andrew Witty struggles to win back investors’ favor.

Witty, who’s led Britain’s largest drugmaker since 2008, is facing criticism for Glaxo’s lagging share performance and a depleted pipeline of promising medicines. A bribery scandal in China that led to a $489 million fine last year and sluggish U.S. sales also eroded support.

“Mr. Witty is running out of time,” said Stephen Bailey, a fund manager at Liontrust Asset Management Plc in London, which holds Glaxo shares. “He’s either got to deliver in the next 12 months or step aside.”

Hampton, 61, previously led the board of Royal Bank of Scotland Group Plc, where he presided over some 90,000 job cuts and a partial dismantling of the firm following the U.K.’s biggest bank bailout. Before that, he oversaw a turnaround as chairman of retailer J Sainsbury Plc.

He replaces Christopher Gent as Glaxo’s chairman on Thursday, a day after the company reports first-quarter results and holds a meeting for investors. Both Hampton and Witty declined to be interviewed through Glaxo’s press office.

Glaxo is trailing its 11 biggest rivals in annual revenue growth, data compiled by Bloomberg show. Its stock sank 7 percent in the past year, through last week, compared with a 30 percent increase in the Bloomberg Europe Pharmaceuticals Index. Only about a quarter of analysts rate Glaxo a buy.

The shares rose 2 percent today to 15.42 pounds at 10:21 a.m. in London.

Building Value

Hampton joins as Witty, 50, is undertaking the biggest reorganization since the merger that created Glaxo 15 years ago. He sold its cancer drugs to Novartis AG in exchange for the Swiss firm’s vaccines business and cash. The companies also formed a joint venture, controlled by Glaxo, to sell consumer health products.

GlaxoSmithKline Plc Chief Executive Officer Andrew Witty. Under Witty, Glaxo settled a marketing probe in the U.S. by paying a $3 billion fine in 2011, and a bribery investigation in China that concluded last year with a $489 million penalty. Photographer: Simon Dawson/Bloomberg
GlaxoSmithKline Plc Chief Executive Officer Andrew Witty. Under Witty, Glaxo settled a marketing probe in the U.S. by paying a $3 billion fine in 2011, and a bribery investigation in China that concluded last year with a $489 million penalty. Photographer: Simon Dawson/Bloomberg

The deals bring more predictable revenue and lessen Glaxo’s dependence on patented drugs, where sales suffer when generic substitutes reach the market. They also turn the London-based giant away from drug development at a time when investors are embracing it, said Bailey. “That’s where you can add value and build value,” he added.

Hampton will have to evaluate the performance of Witty and other senior executives, as any new chairman would, and won’t act rashly, said Justin King, who served as CEO of Sainsbury during Hampton’s tenure as chairman.

Pragmatic Approach

He’ll also have to recruit directors at Glaxo, where at least three will leave in the next 18 months. At Edinburgh - based RBS, where he served as chairman starting in 2009, Hampton revamped the board after nine members left in his first year.

In interviews with three board members and executives who worked with Hampton at Sainsbury and RBS, he was described as inquisitive, pragmatic and down to earth.

“He’s not the slightest bit interested in the trappings of office,” King said. It’s no coincidence Hampton finds himself running companies in trouble, he added. “He has the appetite for challenge -- he’s not a sinecure kind of guy.”

Hampton should reinvest in research at Glaxo, which is failing to produce drugs capable of boosting earnings, said Laura Foll, a fund manager at Henderson Global Investors Ltd. in London, which owns about 7.6 million shares in Glaxo.

Profits are still tied to the aging asthma drug, Advair, while demand for two new respiratory medicines, Breo and Anoro, remains sluggish. The company is considering a spinoff of its HIV medicines, although it has few compounds capable of replacing them. Foll recommends cutting the dividend to fund research, a move some investors might resist.

Leading Change

Glaxo paid out 3.8 billion pounds ($5.7 billion) to shareholders last year, the most among major pharma companies relative to their market capitalization. It also pledged to return 4 billion pounds in proceeds from the Novartis deal to shareholders.

Shares of Glaxo have recovered some ground after the worst annual performance in more than a decade in 2014. The stock has risen about 10 percent so far this year after sales in the U.S. stabilized and the company in December announced 900 job cuts in North Carolina as part of 1 billion pounds in cost reductions.

Even so, Hampton’s appointment should be the catalyst for a re-examination of strategy, Foll said.

“There needs to be some sort of change -- whether that’s under a new management team or not,” she said. “Phil Hampton may be able to lead the change from the top.”

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