Changing shape takes time, said GlaxoSmithKline chief executive Sir Andrew Witty. He’s right. GSK’s three-part transaction with Novartis in vaccines, oncology and consumer products, announced 10 months ago, is still only “on track” for completion in the first half of this year. Meanwhile, the spin-off of Viiv, the HIV business, has become a “2016 event”, assuming it happens, despite being first aired last October.
Glacial Glaxo then? That may be a little unfair. The Novartis deal does indeed look hellishly complicated to execute – 500 lawyers are working on the details. As for Viiv, there doesn’t seem to be any risk in warming up potential investors slowly. Witty is excited that sales of two new HIV drugs are “ahead of original expectations”, Viiv, where GSK owns 80%, is reckoned to be worth £10bn-£15bn. If current sales success means the upper end of the range is more likely, take your time.
What shareholders really want to know, though, is when GSK’s share price graph will change for the better. The shares stand at £14.76, roughly where they were in 2012. In that time AstraZeneca’s have improved 50%, albeit with some tickling from Pfizer’s non-bid, and biotech valuations have headed towards the moon (albeit not yesterday as Gilead of the US bombed). The excitement has entirely escaped GSK.
The main cause is well known. In respiratory drugs – the core of the pharmaceutical division – GSK has suffered patent expiries and tougher pricing tactics by US healthcare insurers. The drag was one reason why 2014’s group-wide performance was filed under “challenging”. Sales fell 3% and operating profits were 6% lower at £6.59bn.
Thus the need for Witty’s reinvention plan for GSK to take effect. Shareholders are starting to worry about their dividend. A same-again 80p a share has been promised for 2015 but the arithmetic is becoming tight: earnings per share for 2014 were 95p, a very high payout ratio.
The good news – finally – is that there are definite signs of a turn. Witty is holding to his pledge that sales from respiratory products will return to growth in 2016. That is critical. And the Novartis deal, when it arrives, ought to deliver a shot of adrenalin. In essence, each company will concentrate on what it does best. Thus GSK is selling oncology, buying vaccines and the pair are pooling resources in toothpastes, painkillers, nicotine gums, etcetera. There ought to be an effect in 2016, if only from cost-saving.
Assuming that is the case, and assuming Witty’s bullish tone on the drugs pipeline is justified, the dividend should be safe. The yield is 5.4%. That looks more tempting than, say, the near-6% available at BP and Shell. Put simply, GSK looks more a master of its own destiny than the oil majors. Progress is slow at GSK – but there is progress.
Don’t bid Sky-high
Nice profits and impressive subscriber figures, Sky. Are you now about to blow the gains by paying a silly price for the next set of Premier League football rights? The answer will arrive soon. The deadline for bids for the seven packages of games for 2016-19 is on Friday.
Two extreme outcomes are possible. The first would see Sky and BT bid high and boldly. BT Sport is the first serious, and well-funded, rival to emerge to Sky Sports. Perhaps Sky has to demonstrate who is boss. For all the company’s boasts about the breadth of its offer in sport, movies and entertainment, nobody really knows how the business would behave without leadership in Premier League matches.
And, from BT’s standpoint, it is in the game now; it won’t want less than its current two-package collection of games, and won’t want to let a newcomer (like Discovery) get a sniff.
Under the other extreme outcome, both main rivals might reflect that they are carrying the financial equivalent of a groin strain and thus bid conservatively.
In BT’s case, Ofcom has just imposed a so-called “margin squeeze” test to regulate the wholesale prices it can charge for fibre broadband access. The cost of offering “free” football to broadband customers must be reflected in the calculations. BT passes the test today. But if it were to grab, say, five packages it might have to introduce up-front charges for BT Sport. That’s risky. The case for caution is strengthened by BT’s defensive line-up. From next season, it has three years of exclusivity on Champions League and Europa League games.
Sky’s handicap is the debt it is carrying after buying all of Sky Italia and most of Deutschland – £6.3bn. It can’t afford to blow the doors off. The City’s best guess is that Sky retains five packages but has to pay about £1.05bn a season, versus £760m currently. That’s the base case. Anything much above that figure will look like over-payment.
