Investors call for surgical strike on GSK

Source: The Guardian Unlimited

Shareholders want new boss to streamline firm
Richard Wachman, city editor
Sunday September 2, 2007
The Observer

GlaxoSmithKline, the UK drugs giant, faces a shareholder revolt over its dismal share price performance. Anger has spilt into discussions between investors and chairman Sir Christopher Gent over who should succeed chief executive Jean-Pierre Garnier. He is due to retire in May 2008.

GSK's big institutional shareholders have held meetings with Gent and told him in no uncertain terms that Garnier's successor should be someone who is prepared to undertake a fundamental overhaul of the company and consider a radical streamlining of its operations, including a possible break-up.

The company, formed out of a merger between Glaxo and SmithKline in 2000, has been swept up in a tide of shareholder discontent with questions being asked about whether the giant pharmaceutical companies - Big Pharma - operate effectively and efficiently.

An analyst said: 'GSK is facing a backlash from investors who want the company to consider whether large, and sometimes cumbersome operations, such as GSK, are best placed to come up with new medicines.'

Shareholders want Garnier's successor to look at all options. These include: demerging manufacturing and/or the research and development arms, shrinking the firm's massive sales force, and offloading non-core operations such as the drinks subsidiary which owns brands including Ribena and Lucozade.

One institutional investor says: 'What we are telling the chairman is that with the industry facing a regulatory clampdown that makes it more difficult to get new medicines approved, GSK should look at ways to release shareholder value. The status quo is no longer an option.'

Another shareholder, who spoke on the basis of anonymity, says: 'GSK should recognise that Big Pharma is broken and needs to be fixed. Garnier's successor needs to take that on board. It's no good producing more of the same.'

Four potential candidates are jostling for the top job: David Stout, president of pharmaceutical operations; Chris Viehbacher, head of the US side, who is thought to be the frontrunner; Andrew Witty, the British head of European operations; and Russell Greig, head of the international division.

GSK's shares traded at close to £15 in early 2000 against a Friday close of £12.79. The stock price has been hit by safety fears linked to Avandia, one of its leading drugs, worries about generic competition and concern about a possible dearth of new blockbuster medicines in GSK's R&D pipeline.

Neil Ransome, head of the pharmaceuticals department at PricewaterhouseCoopers' corporate finance arm, said recently: 'Evidence that mega-mergers in this sector improve the rate of discovery of new drugs isn't compelling.'

Experts say the industry could move towards a model where companies farm out R&D to small biotech companies.

Analysts Citigroup shook the market earlier this year with research suggesting breaking up GSK could boost the value of the firm by half and enable the company to return £20bn to shareholders.