Glaxo May Consider Spinoffs After Novartis Deal Integration

GlaxoSmithKline Plc Chief Executive Officer Andrew Witty Interview

Andrew Witty, chief executive officer of GlaxoSmithKline.

Photographer: Chris Goodney/Bloomberg
  • CEO says deal creates options for consumer health, vaccines
  • Investors have been pushing for spinoffs to boost shares

GlaxoSmithKline Plc Chief Executive Officer Andrew Witty is willing to consider suggestions made by investors to break up the company -- although it may not happen for at least a year or two.

A deal with Novartis AG that closed in March created market-leading businesses in consumer health and vaccines. That gives the U.K.’s biggest drugmaker new options once the integration is complete, Witty said in an interview Tuesday at the J.P. Morgan Healthcare Conference in San Francisco.

“By bringing these businesses all to real global scale, it for the first time creates the optionality for potentially different structures down the road,” Witty said. “We certainly have a year or two more of work to finish” the integration.

Some investors have called for Glaxo to split up to help boost a stock that has stagnated over the past year. The drugmaker is currently made up of units focused on pharmaceuticals, vaccines, HIV medicines and consumer-health products.

“There’s a lack of visibility on certain areas of the company, and if some of these were spun out, I’m sure the value accretion would be greater than the current share price,” said Joe Walters, senior fund manager and manager of the Royal London U.K. Income With Growth Trust, which holds Glaxo shares. “We would welcome a move by the management to try to add value to the company.”

The stock rose as much as 1.6 percent to 1,385.50 pence in London. Witty’s comments came after the close of European stock exchanges on Tuesday.

In particular, Glaxo should consider spinning off its consumer-health division, in the same way that it explored the option for its ViiV Healthcare unit focused on AIDS drugs, Walters said. Glaxo abandoned the plan for an IPO for ViiV in May, given the strong performance of medicines such as Tivicay, which blocks an enzyme critical to the spread of HIV.

The consumer-health industry is fragmented and consolidating. Among others, Reckitt Benckiser Group Plc is seeking to expand its consumer-health products. CEO Rakesh Kapoor said in December he would consider acquiring Pfizer Inc.’s portfolio were it to come up for sale in the wake of its merger with Allergan Plc.

“The consumer division is so big in scale -- it could one day have a life of its own,” Witty said at the conference. A spinoff wouldn’t happen this year or next, he added.

Glaxo’s shares have tumbled more than 20 percent since mid-2013. With generics snapping at the heels of its best-selling lung drug Advair, Glaxo has been touting new follow-up medicines to Advair and its HIV portfolio, while shunning large-scale acquisitions.

The drugmaker may deliver on its 2020 new-product sales target one or two years in advance, Witty said during his presentation. 

‘Poor Performance’

U.K. fund manager Neil Woodford also suggested the company split up and divest some portions of the business.

“What we’d like the business to do is to recognize that it should focus on certain activities in the portfolio and do them better than they have done in the past, and de-merge the bits that they haven’t managed particularly well,” Woodford said in an interview with a BBC radio program last week.

Other investors have said that Glaxo should buy out the minority stakeholders in ViiV --- Pfizer and Shionogi & Co. -- and the consumer-health joint venture with Novartis AG, which hold so-called put options that are limiting Glaxo’s payouts to shareholders and impeding its ability to grow.

While a breakup would boost enterprise value, separately listing its drugs, vaccines and consumer-health units is unlikely to create more than a 10 percent increase, Bloomberg Intelligence analyst Sam Fazeli said in a note Monday.

Glaxo last quarter beat analysts’ earnings estimates and has started to demonstrate areas where it can grow, according to Walters. Still, “as a result of the poor performance historically, there isn’t much room for any further slip-ups,” he said.

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