How GlaxoSmithKline's Much-Criticized Chief's Strategy Differs From His Peers

Published: May 18, 2015

How GlaxoSmithKline's Much-Criticized Chief's Strategy Differs From His Peers
May 11, 2015
By Riley McDermid, Breaking News Sr. Editor

The brisk pace of mergers and acquisitions being done in the healthcare sector is well on its way to break the $450 billion record set in 2014, but when and how GlaxoSmithKline decides to get a piece of the action has market watchers puzzled, with a columnist suggesting Monday Glaxo may grow via its existing assets instead of deals.

The pharmaceutical industry has done $195.2 billion in deals since the beginning of 2015, across all types and shapes and sizes of companies and pipeline. But Hannah Ishmael, a columnist at Bidness Etc, wrote Monday that she thinks Glaxo will grow not on the strength of bolt-on acquisitions, but instead by slimming up its business model.

“The company is now trying to move up the ladder by pursuing a different path than through embarking on strategic acquisitions. The drug-maker is focusing more on its vaccines and consumer healthcare business while aiming to trim costs by dropping projects related to cancer therapies — the hottest area of drug discovery and development at present,” wrote Ishmael.

“This is not because GSK does not have the cash needed to pursue the big names in the sector. Notably, the company, with expected free cash flows of $4.6 billion for 2015 and $3.8 billion for 2016, only has payable debt worth $1.16 billion for 2015 and $809 million for 2016,” she said.

“This shows that the company has enough cash on hand to increase shareholder value through strategic acquisitions.” However the company grows, it had better do it fast. GlaxoSmithKline (GSK came under increasing scrutiny last Tuesday after more analysts 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 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.”

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