Shares in GlaxoSmithKline (GSK) are on an upward path after the Financial Times reported that activist US investor Elliott Investment Management had taken a ‘significant’ multi-billion-pound stake.

The $42 billion fund, known for active campaigns at miner BHP (BHP) and Premier Inn owner Whitbread (WTB), is expected to heap pressure on Glaxo chief executive Emma Walmsley.

Although we don’t know the precise reasons for Elliott’s actions, we can construct a possible narrative. The shares have lagged the sector and the company is in the middle of one of the biggest transformations in its history which will see the consumer healthcare division demerged in 2022.

Given the huge amounts of investment in research and development needed to build a drug pipeline it could be argued that the full sale of the consumer health division would serve long term shareholders better than a demerger.

The deal with Pfizer in 2019 to combine respective consumer health businesses has created one of the best quality consumer franchises boasting such iconic brands as Panadol, Sensodyne and Advil. Such a high-quality asset might command a high multiple should it be sold in its entirety.

BUILDING THE PIPELINE

At the same time Glaxo is in the process of beefing up its biopharma division. It takes a long time to build a pipeline of new drugs, but Glaxo has arguably made good progress and expects to launch more than 20 new products over the next five years.

The biggest drivers of value over the coming decade are expected to be the cancer and vaccine franchises according to Liberum.

One of Walmsley’s first actions in 2018 was the $5.1 billion purchase of US biotech company Tesaro, which spearheaded the relaunch of the cancer franchise.

Although small today, Liberum expects the cancer franchise to generate sales of $2.7 billion by 2030, driven by Zejula (ovarian cancer) and Blenrep (multiple myeloma).

In vaccines, Shingrix, which is used to treat the chicken-pox related disease shingles, has shown good efficacy and is expected to remain an important driver of growth until the end of the decade.

Liberum estimates the cancer and vaccines franchises could add around $7bn to revenues over the decade which will more than compensate for stagnant sales elsewhere.

Liberum analyst Alistair Campbell commented: ‘Our detailed work shows that contrary to market scepticism GSK’s biopharma business will deliver above sector sales growth and high single digit earnings per share growth to 2025. In fact, even in a bear case GSK will still deliver sales growth to 2030, in our view.’

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