GlaxoSmithKline’s chief executive, Sir Andrew Witty, won’t easily silence the calls for a breakup of the out-of-fashion pharmaceuticals, vaccines and toothpaste giant – but the company’s decent finish to 2015 should buy him some time to move at his own pace.
Underlying earnings per share of 75.7p for 2015 didn’t cover the 80p dividend, but the reinvention of GSK was always going to be the work of several years. Witty was able to promise that new pharma products, meaning those launched over the past three years, will achieve £6bn of sales in 2018, two years ahead of the original target. Breo, the drug that will lead the defence of the respiratory territory when fading blockbuster Advair is hit by generic competition in the US, has overcome its slow start. So far, so good.
The breakup argument, as advanced by the fund manager Neil Woodford, hinges on the idea that the sum of GSK’s parts is worth more than the current stock market value. Witty cannot be surprised to hear these cries, since he toyed with the notion of floating off ViiV, the 80%-owned HIV business, a couple of years ago.
These days, the consumer products division, where GSK and Novartis pooled assets in a broader three-part deal in 2014, is the focus of the splitters’ attention. Witty isn’t saying never, but he surely makes a fair point when he argues that now is not the right moment.
The ambition is to double profit margins in consumer products such as Sensodyne over five years. That plan is on track after the first year. Why sell even a sliver before you’ve bagged the easy gains? Reckitt Benckiser, or whoever, will still be around a couple of years from now.
Then there’s the troubled question of the right corporate “balance”. GSK is a broader beast than most of its pharma brethren, but that might soon be an advantage, if the next US administration cuts up rough on the price of prescription medicines. Vaccines and consumer products, with their “annuity-like” earnings, as Witty puts it, are useful defensive assets. More to the point, there’s no sign that GSK is managing them badly.
Under-fire chief executives can resist most criticism as long as the share price goes up. GSK has been a laggard in recent years, which is why investors are growling. But, at £14.31, there’s a fair argument that GSK is a heads-you-win, tails-you-don’t-lose investment. If Witty’s strategy, complete with up to 20 filings of new pharmaceuticals by 2020, works, then the dividend – offering a 5.5% yield – should be safe. If it all goes horribly wrong, the emergency button is the breakup idea.
But pressing the button now seems pointless. There is no emergency.
Silence is deafening from Sports Direct
Most FTSE 100 companies accused by a high court judge of abusing the legal system by bringing “a ridiculous piece of litigation” would be anxious to explain themselves. Not Sports Direct. There was silence from Shirebrook as the sportswear retailer abandoned its legal battle with Rangers football club.
Mr Justice Peter Smith said last month that the company’s request to imprison the Rangers chairman, Dave King, was “designed to intimidate” rather than be a proper sanction for an claimed breach of a confidentiality clause. “It was a muscular tactic using the threat of committal that the court should deplore,” the judge said.
This dispute over confidentiality relates to a joint venture to run Rangers’ club shop that is irrelevant, financially speaking, to Sports Direct. It is tiny in the context of the group. So why continue with a claim that the court regarded as a waste of time and the pursuit of a vendetta?
Only two people can answer that question. One is Mike Ashley, the owner of 55% of Sports Direct and about 9% of Rangers. The other is Keith Hellawell, Sports Direct’s chairman, who ought to be concerned for the company’s reputation. If Hellawell can’t muster a word after such damning remarks by a judge in the high court, outside shareholders will wonder – not for the first time – what he is still doing at Sports Direct.
Syngenta deal may be repellent to western regulators
As Syngenta agreed to be taken over by ChemChina for $43.8bn in cash, the Swiss pesticide group’s chairman, Michel Demaré, declared: “This is absolutely not a China nationalisation.” Really? ChemChina may say it wants to run Syngenta according to western governance principles. But if you are 100% owned by a Chinese state-owned company, you are, to all intents and purposes, controlled by the Chinese state. Expect US and European regulators to take a close look at the effect of a takeover on their agriculture industries. This is far from a done deal.
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