GlaxoSmithKline (LSE: GSK) today announced that chief executive Sir Andrew Witty will step down from the FTSE 100 pharma giant on 31 March next year.
Witty, who began as a management trainee with Glaxo 32 years ago, has been at the helm of the company since May 2008. However, speculation about the 51-year-old’s future has been rife for some time.
Criticism
Witty has faced criticism for falling sales and profits over the last few years, a less promising pipeline of medicines than some rivals and a bribery scandal in China.
Glaxo has also underperformed peers on shareholder returns. According to Bloomberg, the company’s average return has been 10% a year over the last five years, lagging well behind a 17% average annual return for the Bloomberg Europe Pharmaceutical Index.
Return to growth
Despite the travails of recent years, Glaxo is set to return to sales and core earnings growth in 2016. The company posted better-than-expected annual results last month, which Witty said showed that the strategy he’s been pursuing is paying off.
Today, he reiterated the “momentum of our current business performance” and the positive outlook, and said: “By next year, I will have been CEO for nearly 10 years and I believe this will be the right time for a new leader to take over”.
In last month’s results, Glaxo guided that it expects core earnings growth to reach double digits (at constant exchange rates) in 2016 and that its generous dividend will be maintained. At a current share price of just under £14, Glaxo trades on 16.5 times forecast earnings and offers a 5.7% dividend yield. In my opinion, these are attractive numbers for a company set to enter a new growth phase.
Break-up value
If Glaxo looks an appealing prospect in its current form, there’s also potential to deliver significant shareholder returns by breaking up the company. Glaxo’s four divisions of pharmaceuticals, consumer health products, vaccines and HIV medicines could be worth much more as standalone businesses than Glaxo’s current share price values them at.
A number of major shareholders see merit in the company going down this route. Richard Marwood, of Axa Investments, referring to Glaxo’s four divisions, has said: “If you had a blank piece of paper you would have never designed a drugs company like this”. And Marwood has been talking to Glaxo chairman Sir Philip Hampton about this “structural issue”.
Respected fund manager Neil Woodford and his team have also been outspoken on the subject, saying earlier this year: “All four of Glaxo’s major component businesses could be FTSE 100 companies in their own right, and we strongly believe that any future break-up would unlock considerable shareholder value”.
Win-win
Key changes in the boardroom can often be a precursor to major changes to the company. While the chairman said today that Glaxo “remains focused on execution of its strategy to drive growth and performance,” calls to unlock the value in the sum-of-the-parts of the group could intensify.
But, either way, whether Glaxo continues in its present form or is broken up, I reckon the shares are a good-value buy at around the £14 level.
