Gsk Share Discussion Threads

[unastubbs] 24/2/2021 20:16

GlaxoSmithKline: Distribution Change Signals A Future Of Acquisitions

Feb. 15, 2021 5:36 AM ETGlaxoSmithKline plc (GSK)43 Comments22 Likes
Summary

GSK is one of the few discounted pharma stocks which also provides an ample dividend.
Unfortunately, recent announcements have signaled to the markets that the dividend will probably be reduced in order to charge growth projects.
The pull-out from oncology some years ago may have cost it a large market share, but we believe the GSK pipeline looked good enough for satisfying a dividend-oriented shareholder base.

This shift in direction will likely lead to an acquisition-heavy future.
With a future of consolidation, GSK will probably overpay for growth, and thus we are no longer bullish on the stock.

We don't like inorganic growth, and no one really should especially in a high multiple market like this one. With GlaxoSmithKline's (NYSE:GSK) recent announcement that it will be revising its dividend policy due to what is being perceived by investors as a low-productivity R&D house, inorganic growth is a likely future for the company. In addition to the fact that GSK's dividend will be cut, and despite the fact that the spin-off of its consumer healthcare division will do good for the balance sheet, we don't really see any good reason to expect any meaningful gains over the medium term, as fewer catalysts and a reduced dividend will ward interest away. While we remain confident in the stability and health of the business as is, and indeed of its debt capacity, mainly thanks to a deferred set of patent expirations towards the end of the decade, we are not going to see our money erode from value-destroying acquisitions and thus have left our investment.

The Distribution Policy Announcement

The distribution policy announcement was a bit of a surprise to us, although several equity research houses were indicating that it would occur, likely thanks to their discussions with management. While some analysts suspected that the stock would suffer due to CDC guidelines suggesting some time lag between vaccines of any kind after the Pfizer (NYSE:PFE) COVID-19 vaccine is administered, we thought that this risk to performance was overdone and not sufficient reason to de-rate the stock. Indeed, even by CDC guidelines advising a 15-day lag and due to the slow rollout of the vaccine in several geographies, the deferral impact on vaccine schedules for GSK would have been relatively small.

What GSK is suffering from now with its 8% slide from previously stable levels, and what the distribution policy announcement indicates, is that GSK has been suffering primarily from a sentiment problem. With Pfizer's spinoff of Viatris (NASDAQ:VTRS) and other similar moves by companies to accentuate their biopharma businesses, GSK was under a similar pressure. Indeed, this pressure has compounded on the predecessor CEO's mistake of not chasing the oncology market, which at the time was ripe for the taking. The corporate restructuring around the consumer health business was the beginnings of responding to that pressure, as it could emphasize further GSK's more innovative businesses. While this was a reasonable move in our view, also for the debt relief that carving out a stable vehicle like that would provide, this further move is not.

With a relatively forgiving patent expiration timeline, the worst has for the most part passed for GSK. While some patent expirations will occur in coming years in its vaccine portfolio, which we still believe is an underappreciated jewel across the pharma landscape, there are also promising growth trajectories on several GSK products, with a reasonable set of read-outs coming up soon for promising drugs. By no means is GSK a Regeneron (NASDAQ:REGN), but as it stood it was a solid company with growth opportunities to hedge declines in its generics portfolio. We are not yield chasers, but the decision to reverse the payout policy seems to be a situation where management is going to want to ready the kegs to fire off on acquisitions to frontload growth and the perception of innovation before shareholders become too unhappy.

Tough Acquisition Environment

Inorganic growth is not what you want in your portfolio. While in selective niches it can be attractive, like for example in pharma royalties, a PE-esque landscape dominated by Royalty Pharma (NASDAQ:RPRX), multiples are generally very high, especially in hardcore biotech where Redditors have recently taken their money. It is unlikely that GSK will be rolling up very early-stage pharma companies, but it will very likely be making acquisitions to bolster the currently marginal oncology franchise, as well as companies that will provide patents to further pursue inflammation and respiratory.

Multiples across later-stage biotech are becoming more and more dear, especially in the small-cap and mid-cap space where GSK has and will be wading. It relies very heavily on execution by the acquiring companies. We've seen this with Bristol-Myers' (NYSE:BMY) move into Myokardia, where we detailed carefully the implications on LT shareholder value for BMY. Just look at the Biotech ETF (NASDAQ:IBB) to understand the issue.

Conclusions

If GSK is indeed preparing for an inorganic growth spell, and if these transactions don't work out for it, and they might not, the sting to shareholder will be keen, as a languishing R&D picture for the medium term in the context of a botched acquisition will look remarkably bad. We still think that there is a fair bit to offer in the GSK pipeline, and current growers in the portfolio, incidentally from previous and very successful acquisitions by GSK, have room to offset the generics erosion and establish themselves as important contributors to the mix. The pipeline looks alright as well, although definitely not outstanding. Moreover, the efforts with the consumer healthcare JV are also likely to pay off by reducing confounders in the GSK picture. However, this decision to reverse on the payout policy, which GSK stood by just a quarter or two ago through the worst of the COVID-19 lockdowns, reeks a little of management desperation. We don't believe the desperation to be founded; however, we don't want our investment piloted by short-term agendas when growth could have been reasonably expected just over the horizon.

[geckotheglorious] 24/2/2021 19:17

Spud,
You mean the infamous East German sprinters!! :)

[spud] 24/2/2021 17:53

Weren't the Ruskies doing it in the 70s/80s with their female? Shot-putters....?spud

[geckotheglorious] 24/2/2021 17:49

montyhedge
Post 25062
"Worlds changing we have female presenting sport and men doing the cooking programmes, lol"

Agreed. We also have beta males claiming they're women, playing women's sports, ruining it for genuine women because these non women win medals galore

[ny boy] 24/2/2021 17:42

No rush added more 1205, should turn north in a few weeks, long term hold imo

[montyhedge] 24/2/2021 17:39

So your lock in because you don't want to take a loss, fair enough. Sit back receive the nice dividends, that will ease the pain a bit.Astra way they are falling could have a bigger yield in the future than GSK, lol.

[montyhedge] 24/2/2021 17:33

I think GSK could go below 1200p tomorrow, Astra going below 7000p ex div in the morning, sentiment for pharma's at the moment out of favour.

[spud] 24/2/2021 17:20

Monty - Probably because investors like myself don't wish to crystallise a massive loss. It doesn't mean we approve of (Miss) Management (pun intended). spud

[lovewinshatelosses] 24/2/2021 16:49

The split may well end up being so Monty, but you are being generous excusing the many failures that have led to an share price that has dropped below 12 quid (and who knows, lower still perhaps in the days ahead).
It would be good to get a new activist investor on board to shake things up a bit. Anyway, as you say, in the meantime, we can collect the dividend this year.

[montyhedge] 24/2/2021 16:24

Shareholders own the company, directors manage the company easy to get rid of directors. If she went, I think compensation 8.5 million. But I agree with her, the split will be the best thing ever.If you don't agree on the split, why hold GSK.

[muffster] 24/2/2021 16:21

Sorry I see the Buffett sold out citing management failures. Clever

[keyno] 24/2/2021 16:10

Emma W should get back to flogging lipsticks. In fact, I wish she still was.

[ianood] 24/2/2021 15:53

Yes, but it is a longer term investment that should hit paydirt.

On November 8, 2017, Barron became the new CSO and research chief at GlaxoSmithKline amid a shake-up from its new CEO Emma Walmsley. Barron was quoted: "GSK is a company with a rich history of innovation, with many talented scientists who care deeply about translating great science into therapies that make a meaningful difference for patients. I believe there is a significant opportunity to accelerate this effort and am looking forward to joining Emma and the team on this mission.”

[essentialinvestor] 24/2/2021 15:39

Ian, that ties in to oncology. And Luke from AZN.

It's worth staying up to date on comment in sector publications
such as Fiercepharma.

[ianood] 24/2/2021 15:37

Spud - She also brought Hal Barron on board who is thought to be amongst the best in the business, despite having to pay him more than she earns!

[muffster] 24/2/2021 15:22

Below Buffets purchase price now I think

[montyhedge] 24/2/2021 15:16

Worlds changing we have female presenting sport and men doing the cooking programmes, lol.

[essentialinvestor] 24/2/2021 15:12

They are the primary calls and will either deliver value, or not.

And there have been two oncology pipeline setbacks recently.

[semper vigilans] 24/2/2021 15:10

....but we are told that it is so good that women are getting into these positions.

[essentialinvestor] 24/2/2021 15:08

Spud, I'm the last person to stand in her corner, but what I would say fwiw
is EW has effectively made two big calls - CH split and a huge investment in oncology.

It's those two decision that will determine the success, or otherwise,
of her tenure.

That should be much clearer by the end of 2022.

[spud] 24/2/2021 15:03

I asked this question a few weeks ago and got zero response but can anyone tell me what positives EW has had on the Company? Come on chaps, she must have a few fans here!!spud

[meijiman] 24/2/2021 15:00

It's PC correctness gone mad.

[unastubbs] 24/2/2021 14:52

reading this account of the scotia collapse in 2001



i was amused to see this : "Dr Horrobin was considered too fond of "hippy" projects such as primrose oil. The City questioned why his wife, whose most advanced qualification was a BA in English and women's studies, was in charge of Scotia's drug discovery division."

i then checked la walmsley's wiki page - "has an MA in Classics and Modern Languages from Oxford University". Walmsley's running not simply one division in a chancey biotech company whose market cap at it's height was only £600m, but is head of a huge pharma multinational. This stinks like hell.

[gregmorg] 24/2/2021 14:18

All very well that an institution, overseas or otherwise, increases its holding , having held for ten years etc but they have lost clients' serious monies in that period.
Where is the pressure for executive change?

Fundamentals and product news flow are likely to drive this share up or down and the news flow has been pretty unimpressive for far too long so the upside appears quite remote. No one seems to be able to get a grip. This share price maybe edging along the long term bottom but there is minimal indication from anywhere of any significant change in direction. Very Frustrating!

[encarter] 24/2/2021 13:55

They have held some for 10 years.