Interactive Investor

GlaxoSmithKline share price lifted by snap investment

15th April 2021 17:13

Graeme Evans from interactive investor

Pharma stock has had a lacklustre year, but its future looks bright.

The under-performing GlaxoSmithKline (LSE:GSK) share price was sent sharply higher today after an activist hedge fund reportedly built a multi-billion pound stake in the drugs giant.

Elliott Management's interest lifted shares by 6% to 1,363p as investors wondered if a fund with a record of previous campaigns at Whitbread and BHP can stir up change at Glaxo.

The pharma company has endured a lacklustre year despite the wider stock market recovery, with shares the second worst-performing in the FTSE 100 index over the last tax year.

Alongside disappointment at the company's failure so far to produce a Covid-19 vaccine, shares have been hit by uncertainty over the prized dividend once Glaxo spins off its consumer healthcare joint venture into a separate stock market business next year.

More details of capital allocation priorities, including the investment required to bolster the drug development pipeline, will be revealed by chief executive Emma Walmsley in June.

Her strategy is now under even greater scrutiny after the Financial Times reported today that one of the world's most powerful activist investors has taken a “significant” position in the London-based company.

New York-based Elliott, which manages about $42 billion (£30.47 billion) of assets, is perhaps best known in the UK for exerting pressure on Whitbread ahead of the Premier Inn owner's decision in 2018 to sell its 4,000 Costa coffee shops to Coca-Cola for $5.1 billion.

In a case of particular relevance to Glaxo shareholders, Elliott enjoyed some success in December when the rare disease specialist Alexion Pharmaceuticals sold itself to AstraZeneca for $39 billion in the UK company's largest-ever acquisition.

Elliott, which first took a stake in Alexion in 2017, spoke out last May in opposition to the chief executive's plan to diversify its research pipeline, adding that the company should be considering an outright sale to benefit from surging values of biotech companies.

Glaxo's share price performance has lagged its rivals, with the FT noting today that the stock is down 14% since Walmsley took the helm in April 2017, compared with a rise of 49% over the same period for Astra and 16% for US-based Pfizer after both produced Covid-19 vaccines.

Immunisations are at the heart of the global economic fightback, but Glaxo has had to take a backseat to rival Astra despite being the world's largest vaccines company. Glaxo's non-profit-making collaboration with France's Sanofi is now likely to be ready towards the end of this year, rather than the middle of this year as originally hoped.

In the meantime, demand for its best-selling shingles jab Shingrix has been impacted due to the need for health authorities to prioritise the Covid-19 vaccination campaign.

Glaxo recently issued guidance showing that adjusted earnings per share (EPS) at constant currency rates is expected to decline by mid-to-high single digits in 2021. This follows a fall of 4% to 115.9p in 2020 despite a strong performance in HIV, respiratory and oncology.

The company plans to stick to the usual 80p a share payment for this year, having paid this level of dividend since 2014. However, it told shareholders to expect a new distribution policy in 2022 when aggregate distributions will be lower than present.

Glaxo's fourth-quarter dividend of 23p a share, which was barely covered by earnings, was paid to shareholders last week.

Walmsley says she has “high confidence” a new-look Glaxo can have a meaningful global impact on health and achieve significant value creation for shareholders.

She pointed out in February that 20 assets were now in late-stage clinical trials and that more than 20 new product launches were planned by 2026, including at least 10 with potential peak annual revenues of more than $1 billion.

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