GlaxoSmithKline Shareholders Are Willing to Give CEO Time to Revive Company: Report

Published: May 26, 2015

GlaxoSmithKline Shareholders Are Willing to Give CEO Time to Revive Company: Report
May 21, 2015
By Mark Terry and Riley McDermid, Breaking News Staff

Despite sagging stock prices, major investors in U.K.-based GlaxoSmithKline indicated yesterday they are willing to give company CEO Andrew Witty time to turn the company’s fortunes around—but probably not too much time.

GSK did not respond to a request for a statement in time for deadline.

The Financial Times reported that shareholders have decided to give Witty a little more leeway to right his corporate ship. “The company says growth will revive by next year. They have to achieve. “With shares badly underperforming, there need to be some positive signs soon, or pressure could build up against the chief executive,” a top 20 shareholder said. “The company says growth will revive by next year. They have to achieve that.”

The paper also quoted a shareholder as saying that other investors have been “calling for Witty’s head” but argued that he deserved “a bit more time.”

That is a welcome reprieve for Witty, who has face pressure since the beginning of March after more analysts called for him to either step up his performance or resign within the next year, as the company received its new chairman.

“Mr. Witty is running out of time,” said Stephen Bailey, a fund manager at Liontrust Asset Management Plc in London, told Bloomberg on May 11. “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, the company said it would slash his 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.”

But new deals on the horizon and the support of the company’s chairman appear to be giving Witty a newly renewed boost of consensus from Glaxo shareholders. On May 6 the company provided its first quarter report. Witty indicated that the biggest factor in this year’s business will be GSK’s deal with Novartis AG , which created a trifecta of businesses in Vaccines, Pharmaceuticals and Consumer Healthcare.

“With the completion of the Novartis transaction, we have reviewed future prospects for the newly shaped Group, including the opportunities offered through the integration and our cash allocation strategy,” Witty said in a statement. “For 2015, our financial performance will be impacted by the dilutive effect of the transaction and flow through of headwinds encountered in 2014. We then expect to see a sustained improvement in performance with revenues and earnings expected to grow in CAGR terms over the five year period 2016 to 2020 on a CER basis.”

But with GSK’s stock only showing a moderate and shaky recovery, major investors are questioning Witty’s strategy. A year ago, on May 27, 2014, GSK shares went for $54.91. It dropped on Dec. 15, 2014 to $41.30, then rose back to $48.81 on March 20, 2015. It is currently selling for $45.26.

To be sure, the company has had its fair share of bad news and scandal. On Sept. 19, 2014, the Changsha Intermediate People’s Court in southern China fined the company approximately $500 million on bribery charges. It also sentenced former GSK China’s general manager, Mark Reilly, and four other company managers, up to four years in prison. The sentences were suspended and Reilly was immediately deported.

On Feb. 17, 2015, GSK replaced the president of its U.S. pharma operations, Deirdre Connelly, with Jack Bailey. In 2014 GSK reported a decrease of 3 percent of its total revenue to £23 billion.

Pharmaceutical and vaccine sales in Emerging Markets grew by 5 percent and 1 percent in Japan, but European sales were flat. In the U.S., sales dropped by 10 percent. The U.S. drop was related to formulary and contract changes to Advair. GSK also reported that globally, Seretidel/Advair sales were expected to drop in 2015 because of sustained price pressure in the U.S. and Europe, in addition to competition from generics.

The Novartis-GSK deal was announced in April 2014. The two companies agreed to develop a joint consumer healthcare business. Novartis bought GSK’s oncology products for $14.5 billion, with an additional $1.5 billion contingent on a development milestone. GSK paid $7.1 billion plus royalties for Novartis’ vaccines business, minus its flu business. The joint venture is projected to generate £6.5 billion ($10.9 billion) in annual sales.

Some of the speculation and unrest appears linked to the new GSK chairman Philip Hampton, who analysts have suggested has a history of large-scale change and board restructuring. However, Hampton indicated in a statement that Witty had “the complete support of the board.”

Investors had been waiting with bated breath for Sir Philip Hampton, who became the new chairman at GlaxoSmithKline(GSK) in early Mary, to begin his stint at the company, 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, with members Tom de Swaan and Jing Ulrich already announcing they will be stepping down.

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