Jim Armitage: Emma Walmsley’s deal paves the way to find more cures
GSK has evolved more times than the malaria parasite over the centuries, but has always had a mixture of what we now call consumer healthcare and pharmaceuticals.
After all, trace it back to its origins, and you find Victorian herbalist Thomas Beecham’s Beecham Pills laxatives and Joseph Nathan’s Glaxo brand baby milk powder (slogan: Glaxo builds bonny babies).
But as the decades rolled on, the two sides of the business have looked increasingly ill-fitting. Sure, you got nice steady revenues from Lucozade and Panadol to invest in the high-risk, super-expensive game of inventing new prescription drugs. But the two divisions were so different, it has seemed increasingly illogical to shackle them together.
Pfizer was in precisely the same situation, hence its efforts to sell its consumer business this year.
So, merging the two consumer arms makes eminent sense for both businesses.
Key for GSK is that the deal will allow the company to run the finances behind its two different businesses far more appropriately.
Shedding the pharmaceuticals arm from the consumer side of the business will allow that division to bring its debt up to the far more efficient levels enjoyed by Reckitt and other big consumer brand businesses. That frees more cash for shareholders.
The pharmaceuticals division will be able to structure itself more like other drugs companies, with low debt and high equity.
Why do drugs developers want that? Because lower debt means smaller interest repayments and more room to invest in long-term research projects.
This is crucial for chief executive Emma Walmsley because the number of new drugs in GSK’s pipeline looks relatively thin; she needs to get more blockbusters in the laboratory.
In a way, that looks a bit like Astrazeneca’s situation a decade or so back.
Walmsley’s recent takeover of cancer drug maker Tesaro was an attempt to fix that, but more help is clearly needed.
Critics of her predecessor Andrew Witty will ask why he didn’t do this deal long ago.
Well, for starters, he was far more wedded to the conglomerate ideal than the more pragmatic Walmsley.
But the stars weren’t aligned for him anyway. Pfizer’s consumer arm wasn’t up for sale, and the ownership of GSK’s consumer business was far messier than it is now, because part of it was owned by Novartis.
Doing an all-share merger is hard enough to negotiate, without other minority shareholders to worry about.
Walmsley has, with lightning speed, got GSK out of the Novartis problem, and has now been able to reshape GSK to a far more sensible structure. Bravo to her.
Now all she needs is for the labcoats, those modern-day Thomas Beechams, to crack on and find some new cures. That’s the really difficult bit.