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By Neil Unmack
LONDON, July 25 (Reuters Breakingviews) – GlaxoSmithKline can do without the distraction of a breakup. CEO Emma Walmsley on Wednesday unveiled plans to cut costs and invest more in research. It’s a neat riposte to critics who reckon the sprawling drugs and consumer group should split itself up. Their idea looks like more bother than it is worth.
GSK’s structure is a perennial debating topic for corporate financiers since its business spans everything from specialist HIV drugs to headache pills. The model has benefits: stable cash flows from over-the-counter medicines help fund the more volatile pharmaceutical business. But other drug groups like Novartis are slimming down. Meanwhile, patents on some of GSK’s key drugs have expired and its pharma business has lacked focus. As a result, some of its biggest investors want to spin off the consumer unit, the Financial Times reported on July 20.
Such a split would create value, but not a lot. Consumer drug businesses trade at higher valuations than traditional pharmaceutical groups. Reckitt Benckiser‘s enterprise value is, for example, worth nearly 18 times last year’s operating profit, according to Eikon, compared with GSK’s 12 times multiple. Apply the difference to GSK’s consumer division’s EBIT last year, and a breakup might boost GSK’s value by 7.6 billion pounds, or 10 percent of its current market capitalisation.
That’s not to be sniffed at. But Walmsley could argue that GSK’s parts are improving. She wants the operating margin for GSK’s consumer division to rise to the mid-20 percent area from 19 percent and is investing in new talent, including a chief scientific officer. And she has now announced plans to plough more funds into drug development by cutting an extra 400 million pounds of other costs a year by 2021. It would be distracting to separate the businesses when they are doing better.
There’s little place for complacency. Walmsley has to hit her targets, and invest more. That could mean buying new drugs or companies in areas like oncology, where GSK has promising new treatments, but lacks scale. GSK’s relatively high debt, of 2 times EBITDA, means it may need to sell assets, like older medicines. And, she will need to persuade investors that GSK is worth keeping intact. She does, however, have time to prove the naysayers wrong.
(The author is a Breakingviews columnist. The opinions expressed are his own.)
CONTEXT NEWS
– GlaxoSmithKline on July 25 reported second-quarter sales of 7.3 billion pounds. That was 4 percent higher than a year earlier after stripping out moves in exchange rates.
– Chief Executive Emma Walmsley said the company would deliver annual cost savings of 400 million pounds by 2021 and use the money to boost investment in research and development.
– Several of GSK’s top 10 investors have pressed the company’s board to consider spinning off the consumer product division, the Financial Times reported on July 20.
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