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Glaxo Abandons HIV-Unit Spinoff Plan, Reduces Capital Payout

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GlaxoSmithKline Plc shares rose as the U.K.’s biggest drug company abandoned plans to spin off its flourishing HIV-drugs unit and reduced funds to be returned to shareholders, retaining capital for bolstering growth.

The decision to retain its full stake in ViiV Healthcare, an HIV joint venture with Pfizer Inc., reflects the unit’s “very positive outlook,” Glaxo said. The London-based drugmaker also predicted a “significant recovery” in earnings next year, and said it will accrue more than half the savings from a Novartis AG deal in 2016, a year ahead of schedule.

The shift in strategy may alleviate some pressure on Chief Executive Officer Andrew Witty, who has been dogged by a series of missteps including a bribery scandal in China, a depleted pipeline of drugs and lagging share performance. The drugmaker is now in transition after he sold its cancer drugs to Novartis in exchange for the Swiss company’s vaccines and cash. Philip Hampton takes over as chairman tomorrow.

“Glaxo has responded to investor concerns around the strength of the business,” Jeffrey Holford, an analyst at Jefferies LLC, said in a note to clients. Glaxo’s decision to keep its ordinary dividend unchanged and the other steps “are clear evidence of management and the board responding to investor feedback on these issues.”

Shares of Glaxo rose 2.6 percent, the most in almost three months, to 15.40 pounds at 2:05 p.m. in London after initially falling as much as 2.7 percent.

Earnings Revival

While core earnings per share will decline by a “high teens” percentage this year because of pricing pressure on Glaxo’s best-selling respiratory drug, Advair, in the U.S. and Europe, and due to higher costs at businesses acquired from Novartis, they will rebound next year, the company said.

Core EPS will probably climb at a compounded annual growth rate of “mid to high single digits” from 2016 to 2020, according to the statement.

Glaxo said it will cut the amount it will return to shareholders following the Novartis transaction to 1 billion pounds, in part because of expected generic competition to Advair. Glaxo had originally promised to give 4 billion pounds to shareholders.

The ordinary dividend will be 80 pence a share for each of three years through 2017, it said.

The entire cost-savings program following the Novartis deal will be “broadly complete” by the end of 2017, two years earlier than expected, Glaxo said today.

Protecting Dividend

“The dividend is safe, and the long-term guidance points to a sustained recovery,” Mark Purcell, an analyst at Barclays Plc, said in a note to investors today.

The company won’t initiate an initial public offering for ViiV, the company said.

“There’s a lot of value in this business,” Witty told reporters. “We’re glad we reviewed it, we’re glad we reviewed it publicly and we’re very confident that the vast majority of shareholders favor keeping it.”

In the first quarter, profit excluding certain items slipped to 17.3 pence a share, from 21 pence a year earlier, the London-based company said in a statement. Analysts expected 17.8 pence a share, the average of 11 estimates compiled by Bloomberg. Revenue was 5.6 billion pounds, matching the average analyst estimate.

Revenue from HIV treatments rose 42 percent in the first quarter, while sales of Advair, which is losing patent protection, continued to decline.

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