GSK’s PLANNED DIVESTMENT

GlaxoSmithKline has not experienced the best of years, facing a difficult environment for sales, facing similar challenges to most major drugs companies in maintaining the value of its patented portfolio and facing particular anti-corruption challenges in China. GSK is a company that has a struggled to manage positive media messages. This year has seen a fresh appetite for IPOs and these forces, combined with the significant need for fresh capital to fund cutting edge technology are leading GSK to consider a possible floatation of its HIV drugs business.

ViiV Healthcare was established in 2009 as a joint venture between the drugs giants, Pfizer and GSK and its stated objective is focused on a portfolio of anti-retroviral drugs being offered at not-for-profit prices. Despite that ViiV is currently making annual profits of about £1bn and, if spun out, will almost immediately become a major part of the FTSE 100 index with a capitalisation of between £10 to £15 billion.

ViiV Healthcare is a pharmaceutical company specialising in the development of therapies for HIV. Originally created as a result of a joint venture between Pfizer and GSK, today the majority shareholding in ViiV Healthcare is held by GSK whilst Shionogi is also a co-partner in this venture.

GSK’s proposal has been met with a mixed response by the market. GSK’s original release explained that the IPO would be ‘to enhance future strategic flexibility and visibility within the Group’ and that ‘this will provide greater visibility of the intrinsic value we see in its currently marketed assets and future pipeline and also enhance potential future strategic flexibility’. However, this was made at the time of the announcement of disappointing third quarter results which reported a three per cent drop in revenues. The decline was largely due to an eight percent decline in sales in GSK’s key respiratory franchise, which is facing intensifying competition for its top inhaler Advair in the US market and a decline in sales in the pharmaceuticals and vaccines areas despite strong growth in the emerging markets.

The intended IPO of GSK’s ViiV Healthcare investment is only one part of the restructuring programme to be implemented by Sir Andrew Witty and should not be looked at in isolation. The numbers look big but what is Sir Andrew Witty really trying to achieve? Earlier in the year, Sir Andrew Witty announced a three-pronged deal with Novartis. This deal results in the sale of GSK’s oncology business to Novartis for $16bn.

GSK’s stock price has been sliding downwards for the last six months since its spring announcement to refocus its business on respiratory products, vaccines and consumer products. Accordingly, it disposed of its oncology business to Novartis. In light of the current focus, ViiV Healthcare may not be the right fit for the restructured GSK.

Major public companies deciding to divest operations is a common feature of the markets. However, these transactions are difficult to deliver and will, ultimately, only prove successful if the market timing is right, which is very difficult to determine.

Notable examples of “successful” divested PLCs are:

• National Grid (now national Grid Transco) being divested from the English and Welsh electricity distribution network operators
• Vodafone from Racal
• Zeneca (now AstraZeneca) from ICI

A more current example is the forced re-creation and IPO by the monolithic banks that received so much state aid during the financial crisis of those brands they removed from the landscape towards the end of the last century, now in the Phoenix-form of challenger banks TSB and Williams & Glyn.

However, these plans do not always work. In 2007 Land Securities announced an ambitious plan for its break up into three separate PLCs, structured along the lines of its (then) three divisions (retail, London offices and property outsourcing). However, after almost two years of work, this three-cornered demerger had to be abandoned and Land Securities was forced into selling one of its three divisions to its major competitor. It is very difficult to break an organisation down and then reconstruct it along different lines, it is much easier to dispose of an autonomous subsidiary, preferably in a growth area.

GSK’s restructuring programme is expected to achieve an approximately £1bn annual cost savings to be delivered over 3 years. Ultimately, whilst an IPO of GSK’s ViiV Healthcare stake will create a lot of noise for the market, it is likely that GSK’s activities in the US and the respiratory area and the Novartis transactions are likely to have a more significant impact on turnover.

About the Authors

Edward Craft, Partner Wedlake Bell LLP

Edward is Chairman of the Corporate Governance Expert Group of the Quoted Companies Alliance and was recently responsible for The Quoted Companies Alliance Corporate Governance Code 2013 for Small and Mid-Size Quoted Companies.

Edward is a member of the corporate Consulting Editorial Board to Lexis PSL® and sits on the Company Law Committee of The Law Society.

Shveta Nehra, Associate Wedlake Bell LLP