Activist investor Elliott today launched its long-awaited bombshell gameplan for how GlaxoSmithKline should be revived and heavily hinted that boss Emma Walmsley should quit, repeatedly citing management’s “lack of credibility”.
Walmsley is planning to split GSK’s consumer business from its pharmaceuticals and vaccines arm, with her running the latter as chief executive.
While the plan has been widely applauded, some investors have said she should not be allowed to run the drugs arm because she does not have a scientific background.
In an 18 page diatribe against what it claimed was more than a decade of mismanagement at the company, Elliott today demanded new, expert non-executive directors should review who should take over the running of the two sides of the business.
While falling short of specifically calling for Walmsley’s head, the powerful activist said: “Elliott strongly believes that the future CEOs of New GSK and CH (consumer healthcare) must have the skillsets and expertise to match their respective tasks at hand.”
Much of Elliot’s open letter is spent attacking GSK’s track record of underperformance, which it claimed had resulted in a lack of trust among investors and a stark underperformance of the share price.
It said the current lowly share price now fails to reflect the true value of its promising medicines.
It declared that, if GSK could win back that trust, the shares would increase 45%.
Many of the criticisms Elliott made stemmed from the company’s former management - excessive dividend payments and inconsistent strategy which constituted “avoidable mistakes that negatively impacted the share price”.
This included the previous regime’s sale of its cancer treatments business, which Walmsley later rectified by buying Tesaro for $5 billion. Elliott conceded the purchase made sense, but said it was greeted by a fall in the share price at the time due to investors’ lack of trust in GSK’s ability to execute.
It was also damning of specific aspects of the Walmsley regime.
Primarily, while agreeing with her plan to split consumer and pharmaceuticals, the letter condemned the years it had taken for the company to tell investors how this would be done.
Walmsley has been chief executive since 2017, unveiling her new plan a year later, yet shareholders were only told last week of the specifics, during which time the uncertainty had hammered the share price, it said.
Elliott agreed with most of the measures being taken in her strategy but claimed investors’ lack of trust in the company had left the share price unmoved by the plan when it was announced last week.
It called on the company to have “the right leadership through the right process”.
The letter demanded GSK
:: appoints a set of non-executive directors (NEDs) to both sides of the business who would appoint new bosses, considering internal and external candidates. It would offer a list of names for potential NEDs.
:: Pays no profit and revenue-related bonuses unless management meets its 2026 targets of 5% profit growth and over 10% turnover growth. Bonuses should also be considered for medicines hitting certain research and development milestones
:: Increases targets for operating profit margins to encourage more cost efficiencies which can then allow more money to be invested in research. Sets a 32% margin by 2026, not 30% as GSK has set out
:: Considers “impartially” any takeover bids that might arise for the consumer arm before the demerger
:: Does not fully integrate its “jewel in the crown” vaccines business with the pharmaceuticals division. While it was clear the vaccines business should not be sold or based anywhere but the UK, it said keeping its independence would help retain staff and nimbleness.
One major shareholder said he would stand by Walmsley, rejecting Elliott’s attacks. “I think she has been given too much of a hard time for mainly legacy issues that she inherited from her predecessor Sir Andrew Witty and even before him.
“She has brought in good people and she didn’t overpay for businesses like people expected.
“She is doing the demerger, which is the right thing. OK, it took a while but these things are complicated.”
He added that many of her peers running big drug companies also did not have a pharmaceuticals background.
Other shareholders also offered their support for the Walmsley regime to continue.
Michael Stiasny, head of UK equities, M&G Investments, said: “Over the last few years GlaxoSmithKline’s management team has built a solid foundation for success and has recently committed to very credible longer term targets.
“Management is capable of meeting these targets, and should be given the space and time to deliver value from the assets based on the strong groundwork they have already put in place.
“The current share price does not reflect the value of the assets, the brand or the opportunity available.
“We think a change in management would serve no purpose as we cannot see how a new team would be more effective.”
The Elliott letter concluded: “The recommendations outlined in this letter will restore GSK’s credibility, and invigorate its employees, investors, and customers.
“More nimble Vaccines and Pharma businesses will generate more value for shareholders.
“This path to value creation is a rare opportunity. After years of disappointing performance, which led to frustrated shareholders, demotivated employees and an erosion of the Company’s public perception and credibility, GSK is facing a significant inflection point.
“The separation of CH will unlock value for shareholders while allowing a dedicated biopharma-focused management to deliver on its near-term growth prospects while investing in innovation for the long term.
“With the right governance, ambition and execution, we strongly believe that New GSK can deliver and exceed the stated targets by building on its strong asset base and staying the course.
“For investors, simply reducing the credibility gap can unlock 45% of value in the lead up to the full separation of GSK’s CH business, and much more over time if GSK’s focus translates into even modest pipeline breakthroughs.
“The Board has a responsibility to seize this opportunity for future patients, current investors and all other stakeholders.
“We expect GSK to follow the steps above in order to realise its true potential, and we stand ready to help GSK along the way.”