As Hampton Takes Over as Chairman at GlaxoSmithKline, CEO Witty Needs to Deliver or "Step Aside"

Published: May 06, 2015

As Hampton Takes Over as Chairman at GlaxoSmithKline (GSK), CEO Witty Needs to Deliver or
May 5, 2015
By Riley McDermid, Breaking News Sr. Editor

GlaxoSmithKline is under scrutiny Tuesday, after more analysts have called for its longstanding chief executive, Sir Andrew Witty, to either step up his performance or resign within the next year, as the company prepares to receive its new chairman later this week.

“Mr. Witty is running out of time,” said Stephen Bailey, a fund manager at Liontrust Asset Management Plc in London, told Bloomberg. “He’s either got to deliver in the next 12 months or step aside.”

Glaxo has not been able stay out of the headlines lately and Witty’s reputation has taken a hit with it. In late February, it said it would slash CEO Andrew Witty’s pay 46 percent as the firm’s profits continued to nosedive and shares have continued a skid that lost 8 percent over the last year. As part of the new compensation structure, Witty’s annual bonus was halved 51 percent to $1.41 million, though his salary enjoyed a boost of 2.6 percent to $1.68 million.

"You could read it as a message from the board that he’s under-performing,” Nicholas Turner, an analyst with Mirabaud Securities in London, told Bloomberg. “The buck stops with Witty.”

Investors are waiting with bated breath for Sir Philip Hampton, who was named as the new chairman at GlaxoSmithKline(GSK) in September, to begin his stint at the company this Thursday--and they have a laundry list of items they'd like him to address almost as soon as he begins.

Hampton's past resume includes working in executive positions at Sainsbury’s, Lloyds, British Gas, BT and most recently the Royal Bank of Scotland, "Hampton is donning a white coat to tour GSK’s laboratories in an attempt to learn about the sprawling company," reported the Telegraph last month.

"He will start in May with a lot on his plate. Last year, GSK was fined a record £297m by Chinese authorities for its part in a huge bribery scandal," it said, adding that "Hampton’s experience of highly regulated industries will no doubt help navigate the groups’ reputational challenges in Asia, but there are potentially even bigger issues lurking."

The first order of business may be re-ordering the boardroom, members Tom de Swaan and Jing Ulrich already announcing they will be stepping down.

British drugmaker GlaxoSmithKline Plc fired 110 employees in March that were involved in a probe by the Chinese government, as it attempts to clean house after an embarrassing bribery scandal that continues to dog the company.

As such, the workers who were involved in activities “where there is clear evidence of wrongdoing” will be disciplined and even terminated, according to a memo sent by Herve Gisserot, senior vice president and general manager for pharmaceuticals and vaccines for Glaxo in China and Hong Kong.

A year and a half ago Chinese authorities opened the probe to investigate claims of bribing non-government personnel as well as various other misdeeds. In September, regulators there fined Glaxo $479 million, prompting the firm to issue an apology, saying it “fully accepts the facts and evidence.”

“Based on the findings, we have taken disciplinary action against employees whose conduct contravened GSK’s values and code of conduct,” according to the statement seen by Bloomberg.

Hampton's relationship with Witty will play a key part in his success at the company, including the fact that Hampton is known as very down to earth and focused. “He’s not the slightest bit interested in the trappings of office,” said Justin King, who served as CEO of Sainsbury. “It’s no coincidence Hampton finds himself running companies in trouble, he added. “He has the appetite for challenge -- he’s not a sinecure kind of guy.”

Indeed, Witty has been rushing to reassure the market that the massive hemorrhaging of value Glaxo has experienced also stops with him, scrambling in December reassure investors its dividend is secure despite cutting its profit forecast and increasing concern from analysts. Last week, however, analysts speculated Glaxo may stall a $6.1 billion payout to investors following the closing of its asset swap with Novartis AG —and possibly even revoke its dividend payment, a long-held commitment.

In a conference call Dec. 19, Witty told analysts worried about the dividend that they can expect the company to ante up its share. The firm said it will splash out 80 pence, or $ 1.25, per share for 2014.

“I don’t think people should be concerned about that,” Witty said in a call after a shareholder meeting discussing new deals the company is doing with Novartis AG (NVS).

Pending regulatory approval, both in the U.S. and in Europe, Glaxo will sell its cancer drug pipeline to the Swiss company for around $16 billion, in exchange for snapping up Novartis’s entire vaccines business for $7.1 billion. The two are also attempting to partner in a joint health venture, the parameters of which have not yet been distinctly defined.

Glaxo has been a ripe target for bearish analysts this year, after slow growth and whittled forecasts had several predicting the company will have to call in its dividend this year. After Glaxo cut its forecast in July, analysts at Liberum Capital Ltd. warned investors that the likelihood of a dividend cut was “increasing dramatically.”

Instead, Glaxo appears poised to pay out a dividend, even at an enormous cost to the company’s bottom line. If it keeps to its initial 80 pence guidance, it will use around 85 percent of its profits to meet dividend calls this year, one of the highest margins in biotech, let alone the wider capital markets.

To stem the tide of losses, GlaxoSmithKline (GSK) has already hired three heavy hitting banks to advise on the spin-off of its HIV unit, ViiV Healthcare, as Big Pharma once again rushes to take advantage of the hottest initial public offering market in a decade,.

Witty said in October that the company would be undergoing a strategic review of ViiV and the next portion of that review appears to be a listing on the London Stock Exchange, sources close to the deal said this week.

Britain’s largest drugmaker may have hired Morgan Stanley, Goldman, Sachs & Co. and Citi as financial advisers on the potential IPO of ViiV, of which GSK owns 80 percent. The rest is parceled up between global drugmakers Shionogi & Co., Ltd. and Pfizer Inc. .

ViiV has 674 employees in 15 nations and is based in West London. Witty said in October that its size and reach put it at around number 40 for the FTSE 100. At the time, Witty appeared to be showcasing the unit’s value, a classic opening gambit in a run at the public market or for showcasing the company to potential suitors.

“This is not a forecast, but this business will make a £1bn profit this year if you simply grossed up the nine months’ year-to-date on a straight line basis. That, I think, tells you straight away what the kind of underpinning profit number of this business might be,” he said. “Obviously, this business is on an accelerating curve, it is an important business going through a very expansionary phase…and obviously we are keen that our shareholders get to be the full beneficiaries of that.”

Analyst have long projected that it will attempted to spin-out ViiV as a way to both please existing shareholders by streamlining its businesses and bring value back into its existing pipeline. ViiV is a good earner for GSK, bringing in billion annually—a leap that analysts have reconfigured to around £1.4 billion in 2013 to £2.5 billion in 2018 after new drug Tivicay saw a blockbuster debut.

Shareholders will likely be nothing but pleased with that news, after a massive bribery scandal in China in 2014 caused Glaxo to write down huge chunks of its earning, causing a 8 percent drop in its stock price over the past year.

Still, GSK has been struggling to regain some of the value currently being enjoyed by its competitors, and is doing so in creative ways: It is almost finished with a $20 billion asset swap with Swiss drugmaker Novartis AG (NVS), which will boost its vaccines and consumer healthcare divisions, and its IPO of ViiV is another potentially lucrative strategy.

Will Hungry Pfizer Make a Play for Struggling GlaxoSmithKline?
Almost a year after its $119 billion offer for AstraZeneca PLC fell apart in the face of massive opposition from regulators and internal dissent, global drugmaker Pfizer Inc. is once again being floated as a potential buyer of another marquee-name British pharmaceutical company: GlaxoSmithKline . We at BioSpace want to know your thoughts: With cash to burn, will Pfizer go hunting for Glaxo?

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