I see interesting times ahead for the GSK (LSE: GSK) share price. GlaxoSmithKline is one of the largest UK biotech stocks trading on the London Stock Exchange. It’s a global giant, with an impressive £1.7bn free cash flow in Q1 alone.
But its share price has been losing ground against its competitors, barely moving over the last five years. It’s not even kept up with inflation.
Could that be about to change as it goes through what it describes as “the most significant corporate change for GSK in the last 20 years”?
Change ahead for the GSK share price?
For some time, the company has been seen to be lagging behind its peers. The last decade has seen it fall from being the third-largest pharmaceutical company in the world down to 14th, based on its market cap.
CEO Emma Walmsley’s response has been the slow progression of plans to split the company in two. And next month should finally see the spin-off of its Consumer Healthcare division into a separate company called Haleon.
But will the estimated £2.4bn cost of the split, one of the most expensive ever, be worth it?
Can GSK benefit from the deal?
The deal will give the company a one-off pocketful of £7bn in cash to spend. That’s seen as fundamental for developing its drugs pipeline, especially in areas such as cancer where it’s noticeably lagging competitors.
This is something that should have a positive impact on its share price. But that’s only if it’s able to transform itself from a global giant into the nimble biotech-focused company it says it wants to be.
In particular, it wants its R&D teams to focus on the science of the immune system, use of human genetics and advanced technologies.
That all sounds wonderful and exciting on paper – but I’m politely curious (read a little sceptical) as to whether reality will match its ambitions.
Can the ‘new’ GSK compete in the biotech world?
With the pandemic bringing vaccine development sharply into the limelight and increased competition, it’s probably fair to say the biotech world is a tougher place to win these days.
The average business spend for companies developing new drugs may have fallen sharply from a high of $2.8bn to $1.3bn, but that’s still a huge chunk of cash to bet on a single product.
That’s why having a diverse pipeline of drugs is essential for GSK (just like my Foolish investing approach in shares). If one drug fails to perform as hoped, others may plug the revenue gap.
Right now, its focus appears to be on buying its way out of its pipeline problem, such as its recent £1.5bn purchase of Sierra Oncology. Or there’s the £2.1bn upfront payment to Affinivax, a clinical stage vaccine developer.
That’s an expensive approach and not one I’d be keen on seeing it adopt as its main strategy.
The market may well want to see tangible proof of its R&D investments paying off before it rewards GSK with a higher share price.
So to answer my question in the title, I don’t think the fact of the demerger alone will drive the price higher. For now, I’ll hold off on buying GSK shares. But I’ll watch with interest to see if it takes advantage of its post-demerger opportunities.