Is a Bigger Shake-Up at GlaxoSmithKline on the Way?
GlaxoSmithKline (NYSE:GSK) has confirmed plans to separate its consumer and pharmaceutical business units. However, an activist investor appears to want the big drugmaker to take more drastic actions. In this Motley Fool Live video recorded on June 23, Motley Fool contributors Keith Speights and Brian Orelli discuss whether or not a bigger shake-up is on the way for GSK. Keith Speights: Now, speaking of GlaxoSmithKline, the company's CEO, Emma Walmsley, is revealing more details about the upcoming split of its pharmaceutical and consumer businesses today. There's an activist investor though, Elliott Management, that could push for more drastic actions. I did notice, by the way, I just pulled the story up that GlaxoSmithKline has confirmed that they are going to demerge the consumer business in the middle of 2022, their drug business is going to get an $8 billion dividend from the consumer wing. The company has confirmed its plans but Elliott Management is pushing for even more. Brian Orelli: That consumer unit wasn't really all that big of a surprise when GlaxoSmithKline and Pfizer (NYSE:PFE) led forces in a joint venture with their consumer health divisions. They basically [laughs] said that was what their plans were. If I recall correctly, I think Pfizer had the ability, they're the minority shareholder in the joint venture. Pfizer had the ability to force the spin-off after a certain number of years if GlaxoSmithKline didn't want to do it. I think either way it was going to happen. Waiting a few years, I think was a really good choice by the two companies. That allowed them to clean up the books and reduce costs that were redundant between the two divisions, and that'll help get a higher IPO valuation. Presumably, this isn't going to be like a typical IPO where drug companies raise capital, instead I think GlaxoSmithKline and Pfizer are selling their stake during the IPO, which will raise capital for the companies. The higher the valuation, that's really important. For Elliott Management, I think they really want GlaxoSmithKline to spin off their vaccine units. Whether that's a good move is hard to tell from an outsider's perspective. I think you need probably more data than GlaxoSmithKline releases on the breakdown of the vaccine division. The vaccines were down 2%, sales were down 2% in 2020 compared to a three percent decline for pharmaceuticals, but both of them were affected by currency exchanges. If you look on a currency-neutral basis, they were both down 1%. The operating profit is considerably lower for the vaccine group, it's 38.9% versus 45.3% for pharmaceuticals. Pharmaceuticals are more profitable for GlaxoSmithKline than the vaccines are. I think maybe spinning out the established pharmaceuticals division would probably be a better idea than spinning out the vaccines group, sell them to a company like Viatris or another generics company, or spin it out directly into its own company although the sale might make more sense. It sounds like Elliot also wants to look at the company's oncology portfolio and their strategy there. GlaxoSmithKline has made quite a few big bets in immunoncology space on unproven players that they believe might be important in allowing the immune system to attack the cancer. I think it's a risky move that GlaxoSmithKline is making, but it also can have really large payouts as we see with the PD-1 drugs, Keytruda and Opdivo, as well as all the follow-on PD-1 drugs that we've seen. Speights: You make a good point, Brian, about the possibility of spending off the established drugs business. Pfizer did that and I thought that was a good move on Pfizer's part. It put Pfizer in a position to have better growth going forward, and that's even not factoring in the company's COVID-19 vaccine. Maybe that will be the direction that Elliott Management pushes GlaxoSmithKline to do. If so, I think that might be the smartest move for the company. Orelli: You heard it here first. Speights: You heard it here first, on a rainy day in San Diego.