Stocks in Focus: GlaxoSmithKline

Thursday 26 July 2018

GlaxoSmithKline (GSK), the UK based global pharmaceuticals business, is reportedly considering a potential spin-off of its consumer health division from the main pharmaceuticals business.

This has come about on the back of large shareholders expressing doubt that there is a benefit to these two fairly independent divisions being part of the same company.

Last year GSK found a new CEO in Emma Walmsley, formerly of L'Oreal and more recently GSK's consumer health division. She has kept investors on-side and delivered steady results, with a resultant share price rise of over 18 per cent year-to-date. However, this is still down over four per cent from 12 months ago.

The news that GSK is considering streamlining the business follows a theme observed across pharmaceutical companies. Pfizer recently attempted to sell its healthcare division and GSK is buying out Novartis' stake in their joint venture. The purchase gives GSK outright control in determining the future of the consumer health division.

There are motives for maintaining the diversification of GSK; one being the perceived benefit of having the steady, cash generative consumer health business to reduce risk against the innovative medicine development cycle. Innovation tends to be unpredictable and while the possibility of blockbuster drugs with patent protection offering superior margins is attractive, they remain elusive and difficult to develop.

While being a diversified business does appeal, investors also like a company to focus on their core competencies and not get distracted by smaller, less significant parts. Some investors have argued that the sum of the parts is greater than GSK's current valuation and this could lead to an eventual breakup anyway.

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