Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

GlaxoSmithKline's new CEO needs a plan to deliver a better legacy than Andrew Witty.

Shares Flatlining
Glaxo shares have declined 12% in the past year
Source: Bloomberg

The U.K. drugmaker's shares were the worst performing among their peers last year, even when dividends are taken into account, and investors have criticized Witty's leadership publicly and privately.

His one consolation is that Glaxo shares didn't rally on Thursday when the company announced he will depart next year. That may only be because investors were expecting it so keenly.

Glaxo's problems can be attributed to poorly managed patent expiries on blockbuster drugs. The company's success grew on the back of ulcer treatment Zantac in the 1980s. When that came off patent, Glaxo had another blockbuster up its sleeve -- Advair, an asthma drug. But while Glaxo has had some success in discovering new drugs over the last decade, none has turned into a blockbuster capable of succeeding Advair, which lost U.S. patent protection in 2010. Breo, its successor, is taking off, but it's not there yet.

New Drugs
Breo and Anoro have a long way to go before they make up for Advair's stalling revenue
Source: Company filings

The situation has left Glaxo's 3.9 billion pounds ($5.6 billion) of dividend payments in a precarious position: free cash flow was negative last year as core earnings per share shrank in every quarter.

Dwindling Profit
Glaxo's core earnings per share declined every quarter in 2015
Source: Company filings

One prominent British investor, Neil Woodford, is arguing for the company to be broken up.

For Witty's successor, this is an opportunity to make their name by pulling off a turnaround. On a purely financial analysis, the argument for a break-up isn't compelling.

Separating Glaxo into three businesses -- drugs, vaccines and consumer health -- wouldn't boost the company's enterprise value of 82 billion pounds by more than 10 percent, according to Bloomberg Intelligence. Factor in the costs and distractions that go with a break-up, and it doesn't seem worth it. The shares already trade at a 4 percent premium to peers at 16.4 times estimated earnings.

The best approach for the new broom is to take a much more disciplined approach to the way the businesses are run, driving Glaxo's below-average margins higher and improving returns on capital.

That is worth trying within the current group structure. Even if this fails, a break-up will not be the only option. Partially spinning off one of the businesses would allow their management teams more autonomy and focus, and attract new investors while keeping value for existing shareholders.

This in turn is a good argument for Glaxo to look hard externally for Witty's replacement -- as Woodford has advocated. An outsider will find it easier to be aggressive with the operations, and be better able to decide on a break-up if plan A fails.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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