Elliott’s Call for Leadership Change Steps Up Glaxo Pressure

(Bloomberg) -- Elliott Investment Management urged GlaxoSmithKline Plc to beef up the pharma expertise in its top ranks, calling into question Chief Executive Officer Emma Walmsley's leadership of the U.K. drugmaker.

In a letter published Thursday, Elliott described Glaxo as a firm with “a poor record of operational execution and value creation, leading to skepticism about the company's future and an under-appreciation of its true potential.” It was the hedge fund's first public comment since amassing a stake in Glaxo.

Glaxo should consider offers to sell its consumer-health business rather than spin it off and recruit board members with more industry experience, according to Elliott. While the firm stopped short of calling for Walmsley's ouster, its comments about the need for “deep biopharma and consumer health expertise” appeared to point to her non-scientific background.

The letter ratchets up the pressure on Walmsley as she prepares for the consumer-health split to speed up the company's turnaround. Details of the separation, first announced in 2018, were set out for investors last week, with plans to cut the company's dividend for the first time in 20 years as it tries to put the business back on course.

Pharma Experience

“We believe that existing management should remain in place until a decision is made regarding future leadership,” Elliott said in the letter.

Walmsley won the top job after leading the consumer-health unit and her background is in marketing. She has countered by saying that she is a business leader and has hired top scientists like Hal Barron -- a drug hunter with close ties to the California biotech sector -- to help steer the company, telling investors last week she is a “change agent.”

Glaxo said the issues identified aren't new, and it's working to address them. The stock rose as much as 1.3% in London trading.

It's “no surprise that they want a change of CEO and more control via seats on the board,” said Ketan Patel, a fund manager at EdenTree Investment Management Ltd., which holds Glaxo shares. But “Emma has only been in charge for four years and to be blamed for longer-term malaise is unfair.”

Elliott, whose stake in the company became public in April, said Glaxo's consumer spinoff plan shouldn't blind it to selling opportunities if they arise. Proceeds from the deal, it said, could be used to boost spending on research and development. Such a sale could delay the changes even more, according to Patel.

A consumer sale “is something we would expect the board to fully evaluate regardless and it remains evident the list of candidates is very small,” analysts at Deutsche Bank AG said in a note Thursday. “We also remain unconvinced it would necessarily be a good thing for present GSK shareholders.”

Glaxo has lagged behind competitors, most notably AstraZeneca Plc, in share-price performance and bringing new drugs to market in recent years, even as it spent similar amounts on R&D.

The stock has a 45% potential to appreciate, according to Elliott. The firm said Glaxo should increase its profit margin target and incorporate the goal into management's compensation plans, which should be better linked to financial benchmarks.

‘Lost Its Way'

“The discount in the stock reflects the market's sentiment that after years of disappointing returns, GSK has lost its way,” Elliott said in the letter. As the company spins-off its consumer business “it has a significant opportunity to correct this perception and unlock its vast potential.”

As one of the world's biggest vaccine makers, Glaxo's lack of a Covid-19 inoculation has surprised and disappointed some analysts.

The hedge fund urged Glaxo not to fully integrate its vaccines and biopharma businesses after the consumer split to ensure the vaccines arm can retain talent and remain nimble. Elliott said it was not recommending that the vaccines business should be sold or any changes that would mean it wouldn't remain U.K.-owned.

Elliott has a history of pushing underperforming businesses to accelerate efforts to boost shareholder returns -- especially if it decides leadership is dragging its feet. The firm still hasn't disclosed the size of its Glaxo stake.