How this activist investor might react to Glaxo’s Q1 results

A jump in share price after these results quickly reversed. Here’s why.  

The last set of GlaxoSmithKline (LSE:GSK) results before CEO Emma Walmsley sets out plans for the standalone drugs giant is unlikely to have done much to calm investor nerves today.

The focus is now firmly on 23 June, when the group's under-pressure boss will detail her capital allocation priorities, including the investment required to bolster the drug development pipeline and the impact this will have on the dividend outlook from 2022.

For now, the company has set aside another £951 million for paying an unchanged quarterly dividend of 19p a share to investors on 8 July, while the 80p a share in total that Glaxo has paid annually since 2014 is also expected to continue this year.

That will be replaced next year by a new distribution policy that is expected to be lower than present as Glaxo begins life without its demerged consumer healthcare joint venture.

The break-up is supposed to boost firepower for improving the drugs pipeline after a long period of underperformance compared with rivals such as AstraZeneca (LSE:AZN).

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The position of feared activist investor Elliott Management, which has built a big stake in the drugs giant, threatens to cloud that strategy. The reason for its interest has not been revealed, but there's speculation it could press for a cut in research spend or sale of part of the business.

New York-based Elliott, which manages about $42 billion (£30.5 billion) of assets, is perhaps best known in the UK for exerting pressure on Whitbread ahead of the Premier Inn owner's decision in 2018 to sell its 4,000 Costa coffee shops to Coca-Cola for $5.1 billion.

But it should be remembered that Elliott was in the background when rare disease specialist Alexion Pharmaceuticals sold itself to Astra for $39 billion in December. Elliott first took a stake in Alexion in 2017 and spoke out last May in opposition to the chief executive's plan to diversify its research pipeline, adding that the company should be considering an outright sale.

It will be interesting to see if Elliott provides more disclosure on its Glaxo position before 23 June, when Walmsley will also detail the company's growth outlook for as far out as 2031.

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Her presentation on first-quarter results today pointed to an improving trend over the rest of this year, albeit aided by favourable comparisons as the company recovers from Covid-19 impacts such as sharply reduced demand for its best-selling shingles jab Shingrix.

First-quarter revenues fell 15% at constant exchange rates to £7.4 billion, with adjusted earnings per share down by a third to 22.9p a share. A weak cold and flu season due to social distancing measures and comparisons with stockpiling at the start of the pandemic last year meant the revenues for the consumer healthcare arm fell 16% to £2.3 billion.

Walmsley continues to expect adjusted earnings per share will decline by a mid-to-single digit percentage this year ahead of meaningful improvements in revenues and margins next year.

City’s reaction

The Q1 figures and 2021/22 guidance were in line with expectations, helping shares to lift 1.6p to 1,338.4p. However, the company has been one of the worst performing stocks in the FTSE 100 index over the past year after falling from 1,687.6p last April.

One cause for investor disappointment has been the company's lack of progress on delivering a Covid-19 jab, despite being the world's largest vaccines company. Glaxo's non-profit-making collaboration with France's Sanofi is now likely to be ready towards the end of this year, rather than the middle of this year as originally hoped.

Analysts at Liberum remain supportive of the company, however, after publishing a note last week analysing the potential of six key products and opportunity for Glaxo to create a multi-billion franchise based on a new oncology portfolio. The broker has a 1,700p target price.

They wrote: “Our detailed work shows that contrary to market scepticism Glaxo's biopharma business will deliver above sector sales growth and high single digit EPS growth to 2025. In fact, even in a bear case Glaxo will still deliver sales growth to 2030 in our view.”

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The company disclosed today that its R&D pipeline now comprises 59 vaccines and medicines, predominantly in the areas of infectious diseases, oncology and immune-mediated diseases.

It has also identified over 20 potential product approvals which could take place by 2026, of which more than 10 could significantly change medical practice and potentially generate peak annual sales in excess of one billion dollars.

Progress in recent months has included the launch of Cabenuva for HIV and the start of late-stage trials for a new long-acting treatment for severe asthma.