May 1, 2015
By Riley McDermid, BioSpace.com Breaking News Sr. Editor
GlaxoSmithKline ’s sacred cow may finally be on the chopping block, after a consecutively difficult quarters may push the British drugmaker to 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.
“Momentum behind this capital return seems to have stalled,” Berenberg analyst Alistair Campbell wrote in a note to investors today. “With the dividend commitment under pressure, we think there is now a credible possibility the company will cancel the capital return in favor of supporting the dividend.”
Other analysts also said that if GlaxoSmithKline were to sacrifice the payout, it could see its earnings slashed, although its new incoming chairman Philip Hampton, who takes the reins May 7, could have a stronger position to stand on.
“Importantly, in the context of dividend yield, we believe that if GSK were to sacrifice the B share scheme, greater certainty on the dividend in 2016 and beyond might be well received by investors,” Goldman Sachs said in a note.
In December, the chief executive officer of GlaxoSmithKline (GSK) rushed to reassure the market that its dividend is secure despite cutting its profit forecast and increasing concern from analysts.
In a conference call Dec. 19, Chief Executive Officer Andrew 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).
Witty also reassured analysts that shareholders would get an additional 4 billion pounds when the deals with Novartis close. Now, it looks like that payment may be on hold—or canceled all together.
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.
Witty’s remarks appeared to mollify Wall Street at the time, steadying the company’s stock and reassuring market participants. But 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.
