Health

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 has sprung a surprise with the appointment of Emma Walmsley, a classicist, as the drugmaker's chief executive. The appointment ticks all but one box.

The U.K. pharmaceuticals group has been hunting in earnest for a new leader since Andrew Witty announced his retirement in March amid investor grumbling at the company's poor share performance. It's since pulled ahead of European pharma peers, thanks to the post-Brexit fall in sterling. Still, discontent with Glaxo persists. Some investors want the group broken up.

Glaxo as Underdog
Drugmaker's shares have underperformed rivals and the broader market over the past five years.
Source: Bloomberg

The disgruntlement was an argument for appointing an international business leader from outside the company, ideally with an impressive record as a published scientist -- someone with no ties to Glaxo who could nevertheless command respect in the lab.

Walmsley may not be a pure outsider -- she joined in 2010 -- but at least she's no Glaxo lifer. Seventeen years in international positions at L'Oreal make her look more like an external than an internal appointment. She has form on being unsentimental, sacrificing layers of senior management when she bashed together Glaxo's and Novartis's consumer businesses. The competitive instinct is plain to see.

Investors may be unnerved by her praise of Jack Ma of Alibaba as a "courageous business leader with a strong point of view," without a nod to his e-commerce business's highly controversial governance. But the real uncertainty concerns Walmsley's lack of science pedigree.

She's a marketing executive. And her appointment means that the company's CEO designate and its chairman, Philip Hampton, are literary scholars who have spent most of their careers outside science and now run one of the world's biggest R&D operations.

It's a big gamble to go for a non-scientist. But if you have to make a choice between a Nobel Laureate and a great (and well-read) manager, management talent should win. The key issues facing Glaxo right now are general and strategic in nature -- they are about driving operating performance, cutting cost and reviewing its overall structure. 

Walmsley's immediate task will be to bring some of the consumer arm's efficiency to the performance of the pharmaceutical side. Research productivity has to improve if Glaxo is going to find the blockbuster drug it needs. Walmsley's consumer restructuring skills may come in handy here.

Consumer Confidence
GSK's consumer businesses have become an increasing portion of the drugmaker's revenue mix
Source: Bloomberg

As for a break-up, Walmsley needs to keep an open mind. This would involve the sale or demerger of the consumer business. Such a move looks tricky until a co-operation agreement with partner Novartis expires in 2018. And Glaxo shares are trading at a respectable 16 times forecast earnings, in line with European peers Novartis, Roche and AstraZeneca, and a notable premium to Sanofi and Bayer. There's no rush.

But if Glaxo's performance cannot be improved within the current structure, allowing shareholders to own consumer and pharmaceuticals in separate stocks has some logic. Walmsley has already made a point of saying Glaxo's "much loved" consumer brands are among its top assets. You don't need to be scientist to see that they may also be worth more outside the group.

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

To contact the author of this story:
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net