GSK split gives CEO fresh M&A test

Illustration of GSK Panadol tablets
The GSK logo is seen in this illustration taken on January 17, 2022. REUTERS/Dado Ruvic/Illustration

LONDON, July 15 (Reuters Breakingviews) - Breakups offer both parties a fresh start. That’s GlaxoSmithKline (GSK.L) boss Emma Walmsley’s hope as she prepares to hive off the unit that makes Advil painkillers from its core pharmaceutical business. But what’s left – call it New GSK – will also have some familiar headaches.

On Monday, GSK will complete an intricate four-year breakup plan. By listing its consumer health unit, renamed Haleon, the rump drug business, which makes vaccines and HIV treatments, will be more focused and less indebted.

New GSK should grow quickly, thanks to blockbusters such as its shingles vaccine. The snag is that starting in 2027 Dolutegravir, the molecule found in four of the group’s best-selling HIV treatments, will lose patent protection. That will put nearly 5 billion pounds of sales at risk, nearly 20% of the new GSK’s total forecast sales in 2023, UBS analysts estimate.

Walmsley has other irons in the fire. Trial results for a vaccine for respiratory virus RSV are expected in the coming months. That drug could dominate a $5 billion market, according to industry experts. GSK is also working on fresh HIV treatments, such as one that only needs to be injected once a month.

Yet Walmsley will likely have to go on the prowl for takeover targets. The good news is that she will now have more firepower. The spinoff will see Haleon loaded up with debt, and pay a big dividend to its current owners, GSK and Pfizer . That will leave GSK with borrowing of less than 1 times 2023 EBITDA, according to Breakingviews calculations. One target could be SpringWorks Therapeutics (SWTX.O), a $1.5 billion company that already partners with GSK on oncology treatments.

Yet the need for risky M&A is the reason why GSK still trades at a discount to peers. Assume Haleon, once listed, has an enterprise value of 40 billion pounds, or 15 times EBITDA, and carries 10.6 billion pounds of debt. GSK’s 68% stake in its equity, which will mostly be sold upon listing or handed to shareholders, would be worth 20 billion pounds. Next, strip Haleon’s debt and equity out of GSK’s current 116 billion pound valuation and what’s left, New GSK, is worth an implied 86 billion pounds including debt. That’s around 9 times 2023 EBITDA, as per Jefferies estimates, a discount to rival Roche’s (ROG.S) 11 times multiple.

That lowly valuation gives Walmsley plenty to aim for. But to boost it she needs to show she can buy companies as well as break them up.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)


GlaxoSmithKline is to list Haleon, its consumer drugs division, in London on July 18.

Haleon is also expected to list on the New York Stock Exchange soon.

The drugmaker is spinning off the business that makes Advil painkillers and Sensodyne toothpaste so it can focus on vaccines and prescription drugs.

Editing by Neil Unmack and Oliver Taslic

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