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Elliott Entry at Glaxo Piles Pressure on CEO to Speed Turnaround

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Suzi Ring, Scott Deveau and Dinesh Nair
·4 min read
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(Bloomberg) -- Elliott Management Corp.’s decision to build a stake in GlaxoSmithKline Plc piles more pressure on Chief Executive Officer Emma Walmsley to speed up a turnaround of the U.K. pharmaceutical giant.

While the activist hedge fund hasn’t disclosed its rationale for the purchase, the U.S. firm has a history of pushing underperforming businesses to accelerate efforts to boost shareholder returns, especially if it decides leadership is dragging its feet.

Elliott’s move “puts management under pressure to justify their story,” said John Rountree, a managing partner at London pharmaceutical consulting firm Novasecta Ltd.

Since Walmsley took charge four years ago, she’s tried to refocus the company and rebuild its depleted drug pipeline. In 2018, Glaxo announced plans to combine its consumer health unit with Pfizer Inc.’s and split off the business into a separate, U.K.-listed company. That effort isn’t scheduled for completion until next year, though, which has left questions hanging over Walmsley’s strategy.

Massive Carveout

Bankers are already positioning themselves for what could become the biggest corporate carveout in European history. A number of Wall Street advisers have been pitching Glaxo for a role on the deal, though the firm has yet to award any formal mandates, people with knowledge of the matter said.

Glaxo could seek to value the consumer division, which makes products ranging from Sensodyne toothpaste to Advil, at $50 billion or even more, according to the people, who asked not to be identified discussing confidential information. The company is discussing its options with some of its top shareholders before deciding what route to pursue, the people said.

Some potential advisers have suggested Glaxo consider merging the unit with Reckitt Benckiser Group Plc or the consumer-health operations of Sanofi or Bayer AG, according to the people. It could also explore a sale of the business to a company like Nestle SA, the people said.

Elliott has never been a fan of protracted corporate breakups, and the investor’s presence has led some analysts to wonder whether a sale of the pharma business, or even the whole company, could now be a possibility.

Pharma Sale?

“It would make sense to us for Elliott to push for GSK to sell the pharma business to focus on vaccines or to sell itself entirely,” said Naresh Chouhan, founder of Intron Health, a London-based healthcare researcher. “This would allow a potential acquirer to extract synergies by curtailing GSK’s R&D activities.”

Glaxo shares rose for a second day on Friday after falling by almost a fifth in the last 12 months.

Representatives for Glaxo and Elliott declined to comment.

Glaxo has lagged behind competitors, most notably AstraZeneca Plc, in share price performance and bringing new drugs to market in recent years, even as it spent similar amounts on R&D. And, as one of the world’s biggest vaccine makers, its lack of a Covid-19 inoculation has surprised and disappointed some analysts.

Pfizer and Moderna Inc., which have developed safe and effective Covid shots, are generating estimated annual sales of $15 billion and $18 billion, respectively, from those vaccines. Glaxo made 7 billion pounds ($9.6 billion) in sales from its entire vaccine portfolio in 2020, after routine immunizations were disrupted by the pandemic.

“Given GSK is one of the biggest vaccine manufacturers in the world, how it managed to not have a Covid vaccine is baffling to most,” said Chouhan.

Past Campaigns

Also key to its future success is the rebuilding of its oncology portfolio. The company is planning to double its number of blockbuster drugs -- those with revenue of more than $1 billion a year -- by 2026. Glaxo suffered a setback this week after it was forced to stop two mid-stage trials for one of its cancer medicines following a recommendation from the Independent Data Monitoring Committee.

Some of Elliott’s previous campaigns in Europe may provide a blueprint for its strategy. In 2018, it took a stake in Whitbread Plc and pushed for a sale of its Costa Coffee chain. Initially, Whitbread said the process would be completed within 24 months, while Elliott took the view the split could be done in six. Ultimately, Whitbread sold its coffee business to Coca-Cola Co. four months after Elliott made the case for the shorter timetable.

More recently, Elliott has been pushing Finland insurer Sampo Oyj to accelerate its timeline for the disposal of its stake in Nordea Bank Abp.

For some investors, the hedge fund’s entry is an unwelcome distraction just as Glaxo is on the cusp of change.

While the share price hasn’t done Walmsley any favors, “we’ve got to let her execute the strategy,” said Ketan Patel, a fund manager at EdenTree Investment Management Ltd. and a long-term Glaxo investor. “It’s a long duration business. You’ve got to give people five or ten years in order to position the company, bring the pipeline through, and navigate a pandemic, which most people don’t have to do.”

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