Shape Shifter?
GSK continues to face an uncertain future but we believe there is scope for a turnaround through an asset swap which would strengthen the Consumer business and reduce exposure to the ailing Pharma division. The new CEO could be the catalyst for such change and if she executes on an asset swap we believe the shares would re-rate materially. However, in the absence of our ‘fantasy’ M&A scenario we see continued downgrades to consensus and see limited upside to the current share price.‘Get out of Jail Card’ – We have devised a potential asset swap that GSK could engage in with Pfizer which would transform the business. GSK give up their EPP business (Established Pharma, 2015 sales $3.25bn) and in return receive Pfizer’s Consumer business ($3.4bn 2015 sales) and the 11.7% stake that Pfizer own of VIIV. GSK would then have 30% of postminority sales from Consumer Health and accretive earnings from VIIV. This would create more focus for GSK but it would lose scale in EM. However, given GSK’s recent EM track record, we believe that portfolio would be better in Pfizer’s hands.
New CEO Could Transform GSK – Emma Walmsley’s appointment as the next CEO left us concerned that GSK’s R&D unit would continue to flounder without hands-on oversight from a CEO with a strong view on how to fix it. However, if GSK were to meaningfully shift its shape towards CH, her appointment could prove to be a major positive.
10% Below 2020 EPS – Much of the 280bps margin expansion that consensus is forecasting is unlikely to arise based on our analysis of the worsening gross margin. Low margin Consumer & Vaccines drive much of the top-line growth and we forecast a 250bps worsening in the gross margin to 2021. Breo and Anoro royalties alone account for a 60bps worsening.
SOTP Highlights Poor Contribution from Pharma – Our SOTP derived PT of £16.00 includes VIIV on an implied 29x PE and Consumer Health on an implied PE of 21x. Despite this we see limited upside to the current share price given that we assume Pharma trades on just 11x PE based on our forecasted 1% p.a. sales decline 2016-21 for Pharma. We also include the £4.5bn Shionogi contingent liability in our valuation.
Note: This initiation is also included within the "EU Pharmaceuticals - Opportunities Abound" report.
GlaxoSmithKline is a global healthcare company. Co.'s segments include: Pharmaceuticals; Vaccines; and Consumer Healthcare. The Pharmaceuticals segment is focused on developing new medicines in respiratory, HIV, oncology and immuno-inflammation, with discovery research exploring these and other areas. The Vaccines segment has a portfolio and pipeline of vaccines to help protect people throughout life. Co. delivers vaccines to people living in over 160 countries. The Consumer Healthcare segment develops and markets consumer-preferred brands in oral health, pain relief, respiratory, nutrition/gastro-intestinal and skin health.
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