Glaxo’s Best ‘Headache’ Remedy May Be Buying Stakes in Ventures

The drugmaker's profit has been declining as its best-selling Advair faces more competition
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Two of GlaxoSmithKline’s most promising businesses—its joint ventures in HIV drugs and consumer health—harbor both a threat and an opportunity, with a price tag in the billions.

The minority owners of the units—Pfizer, Shionogi, and Novartis—can force Glaxo to buy them out by exercising so-called put options. Bracing for that possibility is limiting Glaxo’s payouts to shareholders and could impede its ability to grow.

The solution may be for the U.K.’s largest drugmaker to buy the stakes before it’s compelled to, investors and analysts say.

“These puts are a headache,” says Richard Marwood, a portfolio manager in London at Axa Investment Managers, a unit of France’s biggest insurer, which holds Glaxo shares in its funds. “It’s a multibillion-pound contingency not in their control.” 

Glaxo declined to comment on whether it’s interested in buying the rest of its ventures.

The drugmaker, whose profit has declined for seven consecutive quarters year-over-year, is searching for growth as its best-selling drug, Advair for asthma, faces more competition. Buying the minority stakes could boost 2018 earnings by 16 percent, says Naresh Chouhan, an analyst at Liberum Capital, a London investment bank.


Chief Executive Officer Andrew Witty cited the specter of the put options in May when he said that Glaxo would return only 1 billion pounds to shareholders from the 4 billion pounds it realized in the transaction that created the consumer-health venture with Novartis.

Purchase Estimation

Novartis owns 36 percent of that business, while Shionogi and Pfizer own a combined 22 percent of ViiV Healthcare, a fast-growing maker of HIV medicines. Chouhan estimated the value of the stakes at a combined 14 billion pounds ($22 billion).

Glaxo should “absolutely” try to buy the stakes, says Alessandro Valentini, a portfolio manager at Causeway Capital Management in Los Angeles, an investor in the drugmaker.

“This is a much better use of capital than other M&A,” he says. “It would make a lot of sense for them to capture more of the economics.”

ViiV, founded in 2009, is Glaxo’s most successful unit, producing more than a quarter of its operating profit. Its sales will probably quadruple by 2022, according to analysts at HSBC.

The new consumer health venture, formed in March, is the world’s second-largest company in the sector, trailing only Johnson & Johnson. It sells such brands as Tums stomach tablets and Sensodyne toothpaste. HSBC estimates that its revenue will increase almost 40 percent by 2022.

Full ownership would give Glaxo more exposure to two of its best divisions, says Simon Gergel, a London-based fund manager at Allianz Global Investors, which owns Glaxo shares. The gain would depend on the cost, he says. “They’ll pay a high price for it.”


Terms for Forcing Stake Sales

  • As of this year, Pfizer can force Glaxo to buy its ViiV stake
  • Shionogi's right to force a sale begins in 2017
  • Novartis's options start in 2018


Novartis hasn’t made any decision on its consumer health stake, a spokesman said.

Shionogi declined to comment on any Glaxo interest in its ViiV holding. “We will continue to keep our good relationship to maximize the value,” spokeswoman Akiko Ono said in an e-mail. A Pfizer representative didn’t respond to a request for comment.


Glaxo is one of the most indebted of European drugmakers, with about $27 billion outstanding, according to data compiled by Bloomberg. The company has promised to pay its regular annual dividend for at least the next three years, a commitment of almost 4 billion pounds a year.

Glaxo shares fell 0.7 percent to 14.47 pounds as of 11:28 a.m. in London. The stock has gained about 8.5 percent this year, including reinvested dividends, while the Bloomberg Europe Pharmaceutical Index has returned 25 percent.


Glaxo's History With Subsidiaries

  • In 2013 and 2014, it spent about 1.2 billion pounds to increase its stakes in two publicly listed Indian units
  • Purchases increased ownership from roughly half to more than 70 percent


Preempting the put options would give Glaxo more room to maneuver, Marwood says.

“If you knew you were going to buy out those options, you could put the financing in place,” says Marwood. “The more question marks you can rub out, the better.”—With Natasha Khan