Is GSK shedding legacy to build its future?

Towards the end of March, GSK found itself becoming the top contender for Pfizer’s Consumer Business. There was much speculation of how GSK CEO Emma Walmsley would find the $20 billion that Pfizer had reportedly valued its business at. However, within 24-48 hours, not only did GSK back out of bidding at Pfizer’s auction, it even announced a decision to buy out Novartis’ stake in its Consumer Healthcare arm for $13 billion. The surprises kept coming. As GSK share prices rose in appreciation, Ms. Walmsley announced that she had asked for a “strategic review” of the Horlicks brand and other consumer nutrition products.

The announcement most affects its Indian arm, GSK Consumer Health which is the largest consumer business for GSK in the world. Horlicks contributes about 75% of the total business and if the brand is sold off, the listed entity will whittle down to 25-30% of its current size.

What is surprising is that not so long ago, Emma Walmsley had said, “we will still continue to invest in India and we consider it a strategic market” referring to its consumer arm which is the largest in the world. Yet, within a short period of time she announced a possible sell-out for Horlicks which outsells Pepsi in India, as reported a few years ago. In fact, the brand is so well entrenched in the consumer psyche, that in some parts of southern India, Horlicks is synonymous with hot milk.

This begs the question why? It’s quite possible that a global spinoff for the consumer business maybe getting considered, which explains the regaining full control of Consumer Health from Novartis. It is unlikely we would witness a separate deal for India alone, and it seems quite plausible that this would be part of the global sale process.

GSK has three core businesses – Pharmaceuticals, Consumer Health and Vaccines. Apart from this it has a joint venture (JV) with Pfizer called ViiV, a specialty business focused on HIV. It is quite well known that activist investor Neil Woodford had quit the Board of Directors of GSK in 2017 citing Ms Walmsley’s resistance to his demand of splitting up GSK’s businesses to unlock value. At that point it wasn’t very difficult to understand why she had resisted. Selling off GSK’s ‘undifferentiated business’ (pharma and consumer) to focus on its ‘differentiated’ parts (vaccines and ViiV) would have left GSK a much small – albeit more profitable – enterprise.

The problem for GSK is that its pharmaceutical arm doesn’t have any strong brands in market or in pipeline. After its biggest brand, Seretide, lost its patent exclusivity, there has been no new success that comes anywhere close to filling that void. GSK must desperately be looking for a product that is in former CEO Witty’s words, “blockbuster capable”. This could explain its recently renewed foray into Oncology.

Yet, the foray is just beginning, and the business will take years to develop. GSK just spent considerable cash buying the Novartis share of the Consumer Health business. So, any large mergers or acquisitions to quickly gain share in Oncology can be safely ruled out for the time being.

That said, GSK Pharma faces strong headwinds with its US subsidiary looking for ways to stabilize and grow ever since flagship brand Advair lost its patent protection. It was assumed that its diversification and strength in Consumer Health would help to de-risk Pharma. So, focusing on pharma at the expense of Consumer Health, currently seems strange.

GSK Pharma R&D doesn’t have much to talk about, forcing Ms Walmsley to considerably downsize the team and exit over 30 projects. It is possible that GSK could be looking to ‘buy innovation’ – low value biotech acquisitions to boost the differentiated specialty portfolio which is a high margin business.

Recent hire, Dr Hal Barron has strong Silicon Valley contacts, having worked in Alphabet-funded Calico before joining GSK. There have been a few such instances of ‘buying innovation’ recently. Gilead bought Cell Design Labs for around $500 million, Novartis bought Advanced Accelerator Applications for $3.9 billion and Roche bought Ignyta for $1.7 billion. This seems like a new trend, as innovation happens more in smaller, agile Silicon Valley based companies than in tired, old Big Pharma R&D sites.

Selling off Consumer Health could give GSK the required war-chest to buy innovation as it prepares to reignite its growth engine. Given Ms Walmsley’s enviable legacy of heading consumer businesses, one expected her faith in GSK’s Consumer Health to strengthen. Her decision to strategically review Horlicks and other brands gives one a feeling that GSK is willing to shed its legacy to build its future.

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