GSK value lies in consumer health; needs time to deliver – investors
- Consumer health JV and vaccines unit can benefit from pharma division
- Needs time for 2014/15 Novartis asset swap to shine through
- Split can then be explored in three to five years - shareholder
GSK’s [LON:GSK] value-creation ability lies with the consumer health joint venture it has with Novartis [VTX:NOVN], two minority shareholders said. GSK can boost the JV through links with its pharmaceutical division and bolt-on buys, the long-only investors said amid calls to break up the company.
GSK should keep an open mind about how best to realise value from its operations and could entertain a split in three to five years, one of the shareholders said. It should first be allowed time to deliver on its strategy after completing a reorganisation and asset swap with Novartis last year, he said.
There have been renewed GSK shake-up calls in 2016. Hedge fund Och-Ziff has reportedly asked for a board reshuffle and new strategic plan by 3Q16. Fund manager Neil Woodford has called for a break-up, saying GSK resembles four different FTSE 100 companies banded together.
GSK trades at 7.01x earnings, compared to an 18.25x average of European peers Reckitt Benckiser [LON:RB], Bayer [ETR:BAYN] and Sanofi [EPA:SAN], according to Dealreporter analytics. UK-based Reckitt Benckiser trades at 13.88x, while Bayer and Sanofi trade at 22.66x and 18.20x, respectively.
The focus should first be on delivering results from the 2014/15 Novartis asset swap, said the second shareholder. Once the swap has been fully integrated and brought to global scale, GSK will be in a position to consider possible different corporate structures, CEO Andrew Witty told investors in January.
The swap saw GSK receive Novartis’ vaccines unit to make it the leading vaccines player in the world, while Novartis took on GSK’s oncology operations. The companies pooled their consumer healthcare products into a joint venture, with GSK taking 63.5% and Novartis 36.5%.
The JV is one of the largest consumer health business in the world, the second shareholder noted. The unit is also undervalued compared to its peers, which trade at over 20x earnings, said the first shareholder.
Pharmaceutical unit research can be translated to products for the consumer health JV and GSK’s vaccines unit, the second shareholder said. GSK should be allowed the time to build on these opportunities, the shareholders said.
Bolt-on acquisitions for the units could also make the units more attractive prior to any split, the first shareholder said. GSK has no need to make larger transactions so soon after closing the Novartis asset swap, said the two shareholders.
GSK could look to buy Novartis out of the JV, the shareholders suggested. Novartis has an option to sell its stake in the JV to GSK after three years. Similarly, GSK could look to take full ownership of ViiV, its HIV treatment business that it owns with Pfizer [NYSE:PFE] and Shionogi [TYO:4507] (13.5% and 10%, respectively), they said.
GSK did not reply to requests for comment.