After a period of over fifteen years, Neil Woodford has decided to sell his portfolio holding of GlaxoSmithKline. This comes after his belief that over this period the company was capable of delivering growth and realising shareholder value. Not only has this not materialised but furthermore Neil is now less optimistic about the future of the company.
Its core pharmaceuticals division has changed substantially but is still contributing broadly the same level of revenues as it was in 2004. The consumer healthcare division has delivered modest progress but its growth rate and margins have been well below that of its peers.
One of Neil's major concerns is centred around the future of its one genuinely successful area, the development of its HIV franchise, ViiV and its most important products, Triumeq and Tivicay which have been delivering robust growth over the past few years. He fears that this growth may not now be sustainable. He said:
"There is a growing competitive threat in this market which could undermine Glaxo's franchise. US biotech company Gilead is currently conducting trials in a potential competitor to ViiV's Triumeq. Phase II data released in February suggested that this new treatment could undermine Glaxo's hitherto robust market position and phase III data is due later this year. Over the past three years, ViiV has been responsible for more than half of Glaxo's growth. If the company's one remaining growth engine starts to falter, this could pose a threat to Glaxo's future revenue growth, earnings and cash flows. This new challenge for the company amplifies several other concerns that I have had and have discussed at length with the company on many occasions. The lack of a rich pipeline, for example, and the lack of strategic options which results from an already stretched balance sheet. These issues loom even larger for the company if ViiV's growth slows. Together, these concerns now make me less convinced that Glaxo's dividend is sustainable".
Another worry is the general future direction of the company. Neil has always made clear the importance of protecting investors capital as much as possible and seeks to ensure alignment between the executive board of a company and its shareholders. However, in the case of Glaxo, he has long been concerned that this is not the case. He said:
"We have long been concerned such a misalignment exists between Glaxo and its shareholders. Throughout his nine years as Chief Executive, we consistently challenged Sir Andrew Witty on a number of issues, as we had his predecessor, Jean-Pierre Garnier. Primarily, these conversations have concerned Glaxo's corporate structure. I have long believed that value could be created for the company's shareholders if it split itself into separate, more specialised business units. The sum of the parts is significantly greater than the whole. Furthermore, a more focused Glaxo would be the driver of better performance - the conglomerate structure has allowed management to disregard the parts of the business that have underperformed. For example, if future success pivoted on the richness of the pharma pipeline, it would have to pay a lot more attention to that pipeline. Instead, the growth delivered by other parts of the business have been seen as a hedge against the underperforming pharma division - management has never had to live or die by the pharmaceutical sword and as a result, that part of the business has not received enough attention.
The company has consistently argued that being diversified is a strength and there are synergies between the business units, particularly between the pharmaceutical division and consumer healthcare. Shareholders have never seen tangible evidence of this. Indeed, the structural underachievement of both the consumer healthcare and the pharmaceuticals unit suggests that these synergies simply do not exist. Splitting the group in to more focused units would allow dedicated management teams to independently realise the full potential of these businesses.
My viewpoint, and that of other like-minded institutional investors, has been heard but ultimately ignored - repeatedly. Andrew Witty has now gone, with Emma Walmsley commencing her tenure as Chief Executive in April. Even before taking her seat she has been keen to portray herself as a 'continuity candidate' and the prospect of a Glaxo breakup now looks more remote than ever".
In an ever changing investment Landscape, Neil believes there is now a 'compelling selection of high-quality stocks where valuations and expectations are far too low'. With strong yield characteristics, his new holdings will fill the gap whilst maintaining the income generating levels of the portfolio, hopefully with a view to improved prospects.
- uploaded - 5 june 2017