GSK refuses to pay expected $20 billion for Pfizer's consumer arm, sees better capital allocation elsewhere

Country : UK

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LONDON, 23 Mar (APM) - GlaxoSmithKline shocked investors and the industry on Friday by withdrawing from the bidding process for Pfizer's consumer healthcare division, which analysts believed could fetch up to $20 billion.
The decision comes 24 hours after UK healthcare and consumer group Reckitt Benckiser pulled out of the bidding process for the business. (APMHE 57411)
GSK's CEO Emma Walmsley said in a brief statement: "While we will continue to review opportunities that may accelerate our strategy, they must meet our criteria for returns and not compromise our priorities for capital allocation.”
The news came as a shock and a relief to shareholders who believed Reckitt Benckiser's withdrawal left GSK in pole position and a bid would prove irresistible for the UK group. However, they feared it would overpay, leaving it saddled with enormous debts which would require its dividend to be cut or abolished.
GSK's shares in early dealing in London on Friday soared more than 5% before settling back to +2.32% at time of writing.
Walmsley has said previously her priority is to boost pharmaceuticals, and she brought in Dr Hal Barron last year and Luke Miels from AstraZeneca to do that. She has also pledged to maintain the group's dividend.
GSK’s consumer healthcare business already contributes about a quarter of overall sales of just over £30 billion and it is the global market leader with a 3.7% market share, according to Euromonitor.

Share price under pressure

Walmsley took over the CEO role on 1 April 2017 from Andrew Witty. Both CEOs have resisted pressure from investors to break up the business. Since she took over, GSK's share price has slumped 24%, mainly on concerns she was on intent on buying the Pfizer consumer arm, with concerns the group's finances would be overstretched.
A banker with deep knowledge of GSK told APM in October 2017 that the group is need of a major shake-up, saying it should slim down, axe thousands of jobs and focus on its core strengths. (APMHE 55274)
He said GSK "is in a real mess because it is so far behind the curve" (in drug development terms). He added: "GSK has this attitude of 'we will be in a bit of this and we will be in a bit of that'. But it needs to focus on far fewer things, such as respiratory and vaccines, and axe thousands of jobs to save money. It employs far too many people."

No suitors?

Pfizer, if no other suitors fail to emerge, will be left with several options, including retaining the business or hiving it off as a separate division.
Merck KGaA is in a similar position to Pfizer. Swiss group Nestlé was said to be the lead bidder for Merck's consumer healthcare arm (APMHE 56368) but apparently pulled out, according to media reports (APMHE 56734).
Merck told APM in November that it was confident the business would command a price tag well in excess of 4 billion euros. (APMHE 55523). However, media reports since then said that it had decided to lower the selling price to below 4 billion euros (APMHE 56999).
GSK has an option to buy out Novartis’ stake in the Swiss pharma's consumer health joint venture following its $20 billion asset swap, should the Swiss pharma wish to sell. Novartis's 36.5% share in the venture is valued at about $10 billion, although there is no indication Novartis is willing to sell.
The banker told APM that consumer health is not the key growth driver and that GSK really needs to ramp up its drugs pipeline to inject substantial growth in group sales and profits.



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