Should GlaxoSmithKline plc Be Broken Up, As Neil Woodford Urges?

Neil Woodford seems to think GlaxoSmithKline plc (LON: GSK) is getting too big for its boots.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

A few years back, when the pharmaceuticals sector was hit by the expiry of a number of key patents and increasing competition from generic drugs, one of GlaxoSmithKline‘s (LSE: GSK) strengths was its size — if anyone had the market clout to crank its drug development pipeline up a notch while keeping eyes peeled for acquisition possibilities, it was surely Glaxo.

But wind on to today, and the pace of progress has been disappointing. The share price has lost 16% over two years, to 1,423p, and looking back over five years we see a gain of only 12%. Dividends have kept on rising, but earnings have been falling — and though this year’s cash handout looks set to yield 6.5%, it wouldn’t be covered by earnings which are set to decline by another 20%.

And though the company reported an 11% growth in core turnover in its third-quarter results, core EPS declined by 13%, as the firm’s product mix shifts to lower margin (but steadier) sales.

Break-up

On top of that, ace investor Neil Woodford is now urging a breakup of the company. According to Sky News, the boss of Woodford Investment Management has been in talks with Glaxo chairman Sir Philip Hampton, trying to persuade him that splitting out the firm’s HIV division (ViiV), its consumer healthcare division and its dermatology division, might be a good move. That comes just a year or so on from Mr Woodford’s support for Glaxo helping bolster the City’s confidence in the drug giant, so is his apparent change of mind a good sign?

GlaxoSmithKline’s changes in direction have been controversial in some circles, after a deal with Swiss giant Novartis saw Glaxo taking over the latter’s vaccines unit, while merging interests to create a new joint venture in the consumer healthcare market, and offloading its cancer business. And at one stage, it looked as if a spin-off of Viiv might be imminent.

But refocusing on lower-margin products like vaccines appears to have had an adverse effect of highlighting Glaxo’s slow pipeline development, particularly regarding its flagship asthma and COPD drug Advair which is facing increasing competition — and the planned replacement for it, Breo Ellipta, has not lived up to early promises for the treatment of COPD with a failure to show it can reduce mortality rates, thus not edging it ahead of the competition.

A return to earnings growth before 2016 was never really on the cards, but confidence in the size of that year’s growth has been slipping. Over the course of the past 12 months, EPS forecasts for both 2015 and 2016 have been scaled back, and most of the City’s tipsters don’t know whether we should buy or sell the shares — the bulk of them are sitting on the Hold fence.

Leave well alone?

But do we just need to have a little more patience? Chief executive Sir Andrew Witty told us at Q3 time that the benefits of the Novartis deal are starting to show through, and said he is confident of “a return to earnings growth in 2016” — oh, and that the 2015 dividend will not be cut. He has also been publicising Glaxo’s pipeline innovation of late, touting the first antibiotic candidate in a new class as a possible winner. The seven-year period Sir Andrew has been in the role is still a short one in terms of what it takes to bring about a long-term turnaround.

In my view, talk of a break-up of GlaxoSmithKline is premature, and we should forget the short term and wait and see what the next couple of years bring.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »