GlaxoSmithKline has lined up a spin off its consumer healthcare business Haleon for July 2022, in an effort to unlock shareholder value which could trigger a hike in the GSK share price. The listing will also help GSK increase its focus on its drug pipeline.
For July 2022 GlaxoSmithKline [GSK.L] set the scene for one of the biggest listings in European markets for decades when it announced plans to spin off its consumer healthcare joint venture Haleon. The move will unlock shareholder value even as the arm flirts with buyers.
Haleon’s turnover is expected to increase from £9.5bn in 2021 to more than £11bn by 2026, making it the largest consumer healthcare company in the world.
Unilever had bid $50bn for the business last year, but GSK declined the offer, reportedly holding out for £60bn.
After the demerger, GlaxoSmithKline will focus on its pharmaceutical treatments, with sales forecast to grow from just under £25bn in 2021 to more than £31bn by 2026.
Investors will be hoping that solely focusing on the lucrative pharmaceutical market can spur the GlaxoSmithKline share price. The stock has lagged its competitors, up 25.4% over the past 12 months through 17 March, compared with AstraZeneca’s [AZN.L] 32.2% growth and Pfizer’s [PFE] 56.8% upside over the same period — a fact that hasn’t been lost on prominent activist investor Elliott Management, which has put pressure on GSK to deliver more lucrative products.
In the year to 10 February, GSK’s share price gained just over 2% as investors turned away from growth stocks and looked for more defensive options. However, since that point, the stock has slipped as the conflict in Ukraine weighs on markets, reflecting the broader FTSE 100. On Thursday 17 March, the stock closed at 1,617.8p.
Haleon to list in the summer
Haleon — a joint-venture between GlaxoSmithKline and Pfizer — is home to brands such as painkillers Panadol and Advil and Sensodyne toothpaste. Following the demerger GlaxoSmithKline will retain a 20% stake, while Pfizer will hold a 32% share in the company.
An investor prospectus due out in June should provide more clues on the expected listing price and share allocation ratio for the split.
The demerger will leave the new GlaxoSmithKline with less of a debt burden and a one-off £7bn dividend that it can use to develop its own pipeline of treatments or acquisitions.
While introducing Haleon to investors in February, GlaxoSmithKline CEO Emma Walmsley (pictured above) said, “(this) promises to be the most significant corporate change for GSK in the last 20 years, to create two new growth companies that will positively impact the health of billions of people.”
Demerger puts spotlight on Walmsley
The focus on spinning out Haleon has occupied GlaxoSmithKline in recent months. However, with the saga coming to an end, investors will now focus on the pharmaceutical side of the business.
Walmsley has been under pressure from activist investor Elliott Management to deliver a more productive pipeline of treatments. In July last year the hedge fund placed further pressure on the firm by calling on its board to assess if Walmsley is the right person to lead GSK following the Haleon split, given her background in consumer healthcare.
At the time, Elliott Management sent a 17-page letter listing its recommendations and pointing to the lagging performance of GlaxoSmithKline’s stock performance compared with its peers. The letter also revealed Elliott Management’s substantial position in GSK for the first time.
GlaxoSmithKline has had some successes in the past year, including the announcement last year that its malaria vaccine would enter mass production. Growth could also come from its shingles vaccine Shingrix, which was approved for use in the UK in September. In the US, sales are expected to plateau at £2bn in 2022, but regulatory approval in other markets could help.
In its annual report, GSK said that it expects sales growth of more than 5% and adjusted operating profit growth of more than 10% on a compound basis between 2021 and 2026. However, a demerger is never a straightforward process and investors will be watching closely to see how Walmsley positions the new GSK to take advantage of its sole focus on pharmaceutical treatments.
Analyst calls on GlaxoSmithKiine
Writing for the Financial Times, Cat Rutter Pooley suggests that on its own Haleon is unlikely to be valued at the £50bn Unilever offered, noting that somewhere in the £40bn range “seems probable”.
On 28 February, Stifel analyst Eric Le Berrigaud initiated coverage of GSK with a ‘hold’ rating. The analyst said that the company had “significantly improved” under the leadership of Emma Walmsley, but that GSK’s share price still wasn’t “attractive enough”. Le Berrigaud has a 1,700p price target on the stock. However, Morgan Stanley analyst Mark Purcell raised his price on GSK to 1,750p from 1,690p on 25 February.
Of the 21 analysts offering 12-month price targets on Refinitiv, GSK has a 1,700p price target, suggesting a 8.9% upside on the 17 March closing price.
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