RUTH SUNDERLAND: Emma Walmsley must deliver GSK break-up

If boss Emma Walmsley fails to deliver break-up, GSK will be easy meat for an overseas predator and the UK will be poorer, says RUTH SUNDERLAND

  • Outcome will affect the UK’s ambitions to be a life-sciences powerhouse
  • For sector built on mega-mergers it is now the fashion in pharma to do the splits
  • Rationale is that GSK has diverged from development of drugs and vaccines

The float of Haleon, the consumer health business being spun out of GSK next month, will be the biggest in London since commodities group Glencore listed more than a decade ago.

The City is expecting a valuation in the range of £38billion to £45billion. 

But the break-up of the pharmaceuticals flagship is more than just another big City deal. Its success, or otherwise, will affect the UK’s ambitions to be a life-sciences powerhouse, for national research and development capability and for levelling up. 

Attracting attention: The break-up of pharmaceuticals flagship GSK is more than just another big City deal

Both businesses will be potential takeover targets. Haleon has already attracted the unwanted attentions of Unilever, and Swiss group Nestle also briefly eyed the firm. 

Ironically for a sector built on mega-mergers – GSK is an agglomeration of Glaxo Wellcome with SmithKline Beecham – it is now the fashion in pharma to do the splits. Johnson & Johnson in the US is hiving off its Listerine mouthwash and baby powder division to focus on pharmaceuticals and medical devices. 

The rationale at GSK is that the mundane business of selling Panadol painkillers and Sensodyne toothpaste has diverged from the high-octane development of drugs and vaccines. Therefore, the two operations would create more value apart. 

This is the view of activist investor Elliott, which has been a thorn in the side of GSK’s chief executive Emma Walmsley, questioning whether as a non-scientist she is the best person to lead the new drugs group. Although aggressive, Elliott has some valid points. On a sum of the parts analysis, GSK has been trading for years at a hefty discount to its intrinsic value. 

The unhappy contrast with AstraZeneca, which won the battle to produce a Covid jab despite GSK’s expertise in vaccines, has only compounded investors’ discontent. 

It would be unfair to blame Walmsley for GSK’s predicament when much of the culpability lies with her predecessors. She inherited a depleted pipeline in urgent need of replenishment, particularly in oncology. 

As well as the demerger, she has pushed through big deals including the $5billion purchase of US cancer specialist Tesaro. 

But she still has plenty to prove. 

The new GSK pharma business has a target of five years of consistent growth of more than 5 per cent a year in sales and more than 10 per cent in profits. These are figures it has in the past failed to achieve. 

The demerger will boost the new GSK balance sheet with a £7billion dividend from Haleon, enabling investment in growth. 

At the point of the split, new GSK will still have a stake of around 13.5 per cent in the consumer health business. The plan is to sell off that holding over time, providing a stream of money to invest in new drugs. 

Separation will also result in a reduced debt burden for the pharma side, as a large chunk of the £19billion currently on the combined books will be allocated to Haleon. 

Stronger financial underpinnings are only one part of the battle, however, and GSK still needs to deliver new blockbusters. 

High hopes are being pinned on a respiratory disease vaccine. GSK is ahead in the race and is expecting to deliver phase-three trial data shortly. This could be huge, with possible sales of more than £1bn, or it could prove another disappointment. 

The firm is setting up a £400m life-sciences nerve centre on land it owns in Stevenage, Hertfordshire, creating a hive of start-up biotech and pharma companies. Again, great if it bears fruit. 

There is a logic to the demerger, but the reorganisation in itself will not bring about the step change in growth Walmsley has promised. If she fails to deliver, GSK will be easier meat for an overseas predator and the UK will be the poorer.