GSK break-up makes no sense: Eden Tree
July 25, 2018

Following the second quarter results from GlaxoSmithKline and speculation surrounding the potential break-up of the company, Ketan Patel, Manager of the Amity UK fund at EdenTree Investment Management, made the following observations.

"GSK Chief Executive Officer Emma Walmsley has made her mark in a very short time via strategic decision-making and assembling a high quality management team, especially in the pharmaceutical division. The decision to buy out the Novartis joint venture took the market by surprise but went a long way to provide greater comfort on the dividend, which had been under considerable pressure.

"Long-term investors will welcome the revised financial guidance, the new approach to R&D and the restructuring programme, which is forecast to save 400 million annually. In addition, the company has a fertile drugs portfolio, which is expected to play out over 2018-2020. The fall in sterling versus the US dollar and a lower tax rate in the US, post the recent reforms by the Trump administration, augur well for the company over the rest of the year.

"The company has returned 23 percent year-to-date, more than ten times the FTSE 100 return. With a yield of over 5 percent, the highest in the global pharmaceutical sector, GSK remains a core holding for income investors.

"A break-up would be premature and very myopic. The sale of the consumer business would yield short term returns for shareholders but would not benefit the business in the long-term. It should be noted Pfizer recently tried to offload its consumer business and failed, with GSK opting to buy-out the JV in consumer with Novartis.

"Consumer is the cash cow for GSK, which allows for long-term R&D investment. The sale of consumer is unlikely to be a straightforward process, given how embedded it is with the GSK global distribution model and may be a costly exercise just to appease some short-term shareholders."





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Following the second quarter results from GlaxoSmithKline and speculation surrounding the potential break-up of the company, Ketan Patel, Manager of the Amity UK fund at EdenTree Investment Management, made the following observations.

"GSK Chief Executive Officer Emma Walmsley has made her mark in a very short time via strategic decision-making and assembling a high quality management team, especially in the pharmaceutical division. The decision to buy out the Novartis joint venture took the market by surprise but went a long way to provide greater comfort on the dividend, which had been under considerable pressure.

"Long-term investors will welcome the revised financial guidance, the new approach to R&D and the restructuring programme, which is forecast to save 400 million annually. In addition, the company has a fertile drugs portfolio, which is expected to play out over 2018-2020. The fall in sterling versus the US dollar and a lower tax rate in the US, post the recent reforms by the Trump administration, augur well for the company over the rest of the year.

"The company has returned 23 percent year-to-date, more than ten times the FTSE 100 return. With a yield of over 5 percent, the highest in the global pharmaceutical sector, GSK remains a core holding for income investors.

"A break-up would be premature and very myopic. The sale of the consumer business would yield short term returns for shareholders but would not benefit the business in the long-term. It should be noted Pfizer recently tried to offload its consumer business and failed, with GSK opting to buy-out the JV in consumer with Novartis.

"Consumer is the cash cow for GSK, which allows for long-term R&D investment. The sale of consumer is unlikely to be a straightforward process, given how embedded it is with the GSK global distribution model and may be a costly exercise just to appease some short-term shareholders."



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