Glaxo's Witty Lists 'Fundamentals' For Consumer Business Prowess
This article was originally published in The Tan Sheet
Executive Summary
Andrew Witty tells analysts Glaxo is strong in areas critical to success in the consumer health products space: margin, scale and potential OTC switches. The Flonase Allergy Relief OTC switch shows "nobody is switching products better than GSK," he says.
Andrew Witty relinquishes the GlaxoSmithKline PLC helm in a year but he makes a case for the firm holding onto the consumer health care products business after he leaves despite persistent suggestions to spin off the division.
During Glaxo's fiscal 2016 first-quarter earnings briefing on April 27, Witty told analysts that the firm is strong in "the fundamentals of the business," areas critical to success in the consumer health products space: margin, scale and potential OTC switches.
The CEO consistently has supported keeping OTC drugs and nutritional products under Glaxo's roof. While he has acknowledged the reasoning behind analysts' and investors' suggestions to divest the consumer or other Glaxo businesses, he made clear again during the briefing that he sees the firm holding onto the division.
GSK Consumer HealthCare LP, the joint venture with Novartis AG that Glaxo has been operating since mid-2015, is generating 17% operating margin, he noted (Also see "Glaxo In Charge, And The World Is GSK/Novartis Consumer Product JV’s Oyster" - Pink Sheet, 8 Jun, 2015.).
"We're delivering decent numbers and we're moving forward very quickly into a very, very peer-competitive position in terms of the economics of this business. And that's going to drive off, is driving off, significant profitability and significant cash flow."
He also pointed out that proponents of divesting or spinning off the business are assuming it would perform as well or better on its own.
"To my knowledge there is no pure play consumer health care company of scale in the world. Every single consumer health care company that exists is part of a diversified group. It's either part of a pharmaceutical company or it's part of some other company that sells things like household cleaning goods or razors or whatever, but it's part of a diversified group," Witty said.
Additionally, the UK pharma's Rx franchises provide a fertile pipeline for potential OTC switches, which are "the majority of growth of high-margin products" in the nonprescription market, he said.
Witty estimated that 90% of the OTC switches approved in the past 10 years are marketed by the consumer division under the same roof of the innovator firm. GSK Consumer Healthcare has both Glaxo and Novartis as switch-candidate sources.
"It's very rare to see switches go outside a family," he said, adding, "if you look at success of Flonase [Allergy Relief] OTC, nobody is switching products better than GSK."
On the other hand, "long-term switch dynamics … would be a gigantic dis-synergy if you locked yourself out of switches," Witty said.
"When we've gone through the analysis of separating out the companies, there is clearly a dis-synergy, probably of the order of two, maybe more points of margin for the consumer business. And there's probably also a dis-synergy for the parent pharma business also."
Witty said Glaxo made the JV deal with Novartis to provide scale, opportunity and structure to be competitive in consumer health. With the results of the move, "the board remains unanimous around the structure of the company for the foreseeable future."
Acquisition More Likely Than Sale
What's more, adding to the consumer business is not off the table for Glaxo.
The firm likely would make a big move, even though the JV with Novartis provides "a very unique platform to potentially strike different sorts of transactions," said the CEO, who announced in March he would step down at the end of the 2017 first quarter .
"I think at the scale we've now created, if we're going to do M&A, it needs to be serious M&A and not little bolt-on things."
Flonase Allergy Relief (fluticasone propionate/50mcg spray) helped GSK Consumer Healthcare's sales in the US up 26% on a constant exchange rate to £440m ($639.8m) for the January-March period. The JV's European sales were up 46% to $778m, sales in other international markets grew 17% to $1.1bn and overall its revenues grew 26% to $2.6bn.
Flonase, Theraflu cold treatments and other brands in the wellness category led the JV with $1.3bn in sales, up 42%, while sales of Sensodyne toothpaste and other oral care products grew 6% to $743m and skin health product sales jumped 93% to $200m, according to Glaxo. Nutritional product sales slipped 3% to $252m.
The company reported 8% growth in overall sales to $9.01bn, operating profit up 13% to $2.6bn and earnings per share of 8.3 cents. It raised its guidance slightly for 2016, targeting core earnings-per-share growth of 10% to 12% on a constant exchange rate.