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.

Emma Walmsley has disappointed the investment bankers. The new CEO of GlaxoSmithKline Plc has reviewed the drugmaker's strategy and decided against big structural changes in favor of just managing things better.

It looks like the company is going to be run for the benefit of its shareholders more than its scientists.

Glaxo Trails
The drugmaker's shares have lagged the wider U.K. benchmark index
Source: Bloomberg

Walmsley took the helm of a group with three strong businesses in consumer healthcare, vaccines and HIV drugs. The laggard was the rest of the pharmaceutical operation, which is struggling to conjure up lab successes. That matters because Glaxo's lead drug, respiratory medicine Advair, now faces the threat of generic competition.

Some investors thought the remedy was to carve out the consumer unit, enabling management to focus on reviving the pharma operation. But the consumer arm has science behind it, and benefits from sharing in Glaxo's global infrastructure.

What's more, it should be possible to address research productivity within the current structure. This is what Walmsley is trying to do. Most of the R&D budget will be allocated to a handful of key areas -- respiratory; HIV and infectious diseases; oncology; and immuno-inflammation. The first two Glaxo is well-established in. It lacks scale in the others, having sold most of its oncology assets to joint-venture partner Novartis AG in 2014, but at least it has an existing science foundation on which to build. Meanwhile, 30 projects are to be scrapped or put into partnerships.

This focus on prioritizing winners and killing weaker prospects is just what investors wanted to hear. In less than four months, Walmsley has also identified 1 billion pounds ($1.3 billion) of cost cuts, largely from procurement.

There's no rabbit being pulled from a hat here. Indeed, awkwardly for Walmsley, the consumer business she came from had a weak second quarter. Growth this year and next will be marginal. Consumer giants like Reckitt Benckiser Plc and Unilever NV are likewise struggling to grow organically.

There were never going to be quick fixes for Glaxo. Investors have the dividend to hold onto, which now looks more affordable thanks to the pound's devaluation. Glaxo says it will be 80 pence again next year, and it has pledged to grow the payout once free cashflow exceeds it by at least 25 percent. The payout has, in the past, been ahead of free cashflow. The flip-side of holding the dividend is less room to invest in drug discovery.

Dwindling Premium
GSK's shares are trading at a smaller multiple of earnings
Source: Bloomberg

Glaxo shares trade at a 10 percent discount to their peers on a price-to-forward-earnings basis, and have lagged the sector this year. Walmsley may want to show she is running the company for shareholders. She shouldn't forget that profits for shareholders are a byproduct of successful scientists.

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:
Edward Evans at eevans3@bloomberg.net