Witty targets HGS with first hostile bid
Andrew Witty’s distaste for larger deals reflects the painful history of ‘mega-mergers’
Henry Wellcome, the US immigrant who laid the foundations 130 years ago for the UK-based pharmaceutical group GlaxoSmithKline, was almost 80 before he received a knighthood. Andrew Witty, his most recent successor, achieved the honour this year aged just 47, with big tests for his leadership still ahead.
Sir Andrew, a marathon runner, has been sprinting to restructure GSK since he took over in 2008 at a time of patent expiries, pricing pressures and investor scepticism. It is marked most recently by his $2.6bn bid this week for Human Genome Sciences – his second-biggest acquisition and the first hostile one.
The company has been re-rated by investors relative to several of its peers, including AstraZeneca, whose head David Brennan was just ousted in the wake of rising investor dissatisfaction. But like his UK rival many say the rising GSK multiple has been driven by higher dividends and share buybacks funded by cost-cutting and disposals, rather than any fundamental shift in the underlying business.
“GSK is still reliant on an unproven pipeline to deliver and keep drug sales essentially flat,” wrote Credit Suisse in a recent research note. “It has little further room to improve payouts to investors above current expectations.”
Unlike Henry Wellcome, or Jean-Pierre Garnier, his immediate French predecessor, Sir Andrew is proudly British in his roots and tastes, despite spending much of his career in the group’s outposts in Africa, Asia and the US as well as Europe. He stresses he is running a British multinational company, locating his top managers in GSK’s headquarters in west London.
He has accelerated Mr Garnier’s efforts to restructure research and development; enhance commitment to access for poor patients to life-saving medicines; and diversify from “white pills in western markets” to biological drugs, vaccines and consumer healthcare including in emerging markets.
He has advised the previous Labour and current Con-Lib British governments, rewarded not only with a knighthood but enhanced tax incentives crystallised in the “patent box” agreed in this year’s Budget, which triggered his decision to proceed with significant new manufacturing investment in the UK.
Yet Sir Andrew is still drawn to the US, and not only because it is the world’s largest drugs market. It remains pivotal to innovation – reflected in his bid for Human Genome Sciences, with its lupus drug Benlysta already sold in partnership with GSK. It is also home to the largest pool of investors receptive to his message.
GSK still reinvests heavily in its core business developing patented prescription medicines, without yet producing many new “blockbusters” from its pipeline. Most of its organic growth and modest “bolt-on acquisitions” in other divisions remain too small to shift the direction of the company.
Sir Andrew’s distaste for larger deals reflects the painful history of “megamergers” that has periodically gripped the industry and generated only limited returns while distracting management, including the 2000 deal that created GSK.
In the coming months, executives hope to be able to launch high-margin, top-selling new products following their latest re-engineering of the pipeline designed to boost the painfully slow process of medical innovation. Otherwise, investor opinion could sour. In pharmaceuticals, it helps to have the stamina of a long distance runner. Shareholders are less patient.