GSK share price under pressure from activist investors

GlaxoSmithKline’s [GSK.L] share price has returned to rude health, bolstered by the emergence of activist investor Elliott Management and firmer plans about its demerger.

Following the arrival of Elliott, which took a ‘significant’ stake in April, the GSK share price hit 1435.4p at the close on 17 June. It has continued to rise since then.

This follows several months of stagnancy, where the GSK share price had dropped from 1611.6p at the close on 12 August 2020 to 1291.8p at the close on 30 October 2020. At the time, the business was struggling to match the COVID-19 vaccine achievements of rival AstraZeneca [AZN.L].

GSK’s coronavirus vaccine, developed in collaboration with French partner Sanofi [SAN], was delayed in 2020 after disappointing trial results.

The GSK share price continued to fall at the start of 2021, hitting 1190.8p at the close on 26 February, despite annual profits rising from £6.2bn to £6.97bn and revenues up from £33.8bn to £34.1bn.

Revenues at its consumer division, including products like Aquafresh toothpaste, climbed 12%, but its pharmaceuticals revenues fell 3% and vaccines dropped 2%. Earnings fell 4% to 115.9p, with a further mid to high single-digit decline expected in 2021.

GSK share price turnaround

In May, it was reported by The Mail on Sunday that Elliott, led by billionaire investor Paul Singer, had spoken to other GSK investors about whether chief executive Dame Emma Walmsley was up to the job.

Since she took on the role in April 2017, the GSK share price has dropped from around 1637p, although it was as high as 1846p on 17 January 2020.

Walmsley, however, hailed a “step-change” in the fortunes of the business at its Capital Markets Day in June, when it further outlined plans to demerge its consumer business as a separately listed company in London next summer. Walmsley will lead the remaining pharma business called New GSK.

Between 2021 and 2026, New GSK expects to deliver sales growth and adjusted operating profit growth of more than 5% and 10% CAGR, respectively, driven by new vaccines and speciality medicines.

Its vaccines business increased revenues from £4.6bn in 2016 to £7bn in 2020.

Despite describing the demerger as sensible, Elliott was not placated. In an open letter to GSK chairman Sir Jonathan Symonds, it stated that GSK had failed to capture business opportunities due to years of under management, leaving its share price underperforming “every single peer”. Elliott said that over the last 15 years, GSK had dropped from “being the third-largest pharma company to the eleventh-largest one”.

However, Elliott argues that GSK could generate up to 45% upside in its share price in the lead-up to its separation and in the future.

Its vaccines business was the global leader, Elliott said, with the widest technology and product portfolio, and its pharma business had strengths in areas such as HIV.

It called on the GSK board to confirm that before the separation, non-executive directors would be appointed with “deep biopharma and consumer healthcare expertise” and that there would also be robust processes for selecting the best executive leadership for New GSK and consumer healthcare, considering both internal and external candidates.

It also called for a 32% (rather than 30%) operating profit margin by 2026 and for GSK to consider “strategic transactions”, including the sale of its Consumer Health division to boost R&D spending and shareholder returns.

GSK responded by stating that it “strongly believes Emma Walmsley is the right leader of New GSK”, and in July, it appointed its current consumer healthcare head Brian McNamara to lead up the new consumer business.

With regards to talk of a consumer division sale, it said that GSK shareholders wished to own it as a new listed entity given its “strong prospects for sustainable sales and profit growth”.

But it would “fulfil its fiduciary duties to evaluate any alternative options for Consumer Healthcare that may arise”.

How analysts view the GSK share price

Despite the activity around GSK, including announcing a 6% rise in second-quarter revenues to £8.1bn and COVID-19 vaccine trials, its share price has flatlined since June.

However, it is now starting to steadily rise. At the market close on 10 August, it stood at 1446p.

Investors, it appears, want to know more, particularly how strong its vaccine and drugs pipeline will be going forward.

“The onus is on GSK’s development pipeline,” AJ Bell investment director Russ Mould said. “The key areas of focus remain infectious diseases, HIV, oncology and immunology/respiratory.”

“The onus is on GSK’s development pipeline. The key areas of focus remain infectious diseases, HIV, oncology and immunology/respiratory” - AJ Bell investment director Russ Mould

Jefferies analysts believe 2021 is a transition year for the group before new drugs “drive growth” and “clinical news kick-starts belief in the steadily reinvigorated pipeline”. It has also highlighted a possible sale of pharma divisions such as dermatology and underappreciated value in GSK’s biotech investments such as CureVac. It has a GSK price target of 1925p.

Investors may also want to await Walmsley’s fate, despite the fact she recently received backing from rival AstraZeneca boss Pascal Soriot. He says Walmsley should “stick to her guns”.