That means continued pressure on Chief Executive Andrew Witty, seen
not so long ago as one of the sector's star managers, who is under
fire for allowing the erosion of GSK's all-important U.S. business
just as much as for the woes in China.
"I think GSK is a buy when the CEO of that business goes," said John
Bennett, a director of European equities at Henderson Global
Investors, which has a holding in the drugmaker.
Other disgruntled shareholders believe an accelerated change of
chairman would be an important signal that the company is acting to
address their concerns and working to improve financial returns.
The current chairman, one-time Vodafone chief Chris Gent, is due to
step down by the end of 2015 but some argue the handover should now
be brought forward.
"A new chairman must be overdue. Someone needs to look at the
strategic direction of the business with a fresh pair of eyes," said
one top-50 shareholder.
Commenting on plans to find a successor, a GSK spokesman said:
"Succession planning for the chairman is well under way."
Replacing the chairman early rather than ditching CEO Witty, who has
been in the job since 2008, is seen as a potential compromise to
reassure disenchanted investors.
SHARES PRICE SAGS
The root of investor unhappiness is not hard to find. While the
European healthcare sector has been a roll so far this year, rising
more than 20 percent on optimism over new drugs, GSK shares have
lost 10 percent as forecasts for its sales and earnings have fallen.
GSK unveiled a far-reaching asset swap deal with Novartis in April
that will refocus its business by building up its strengths in
vaccines and consumer health, in exchange for exiting the hot area
of cancer medicine.
In the long term, that transaction should deliver sustainable growth
from more stable and lower-risk businesses.
But the Novartis deal will not close until next year and will take
time to bed down -- and even when it does, the new-look GSK is still
likely to grow below its peers, according to Goldman Sachs analysts,
who believe further meaningful change is needed.
"A new chairman could potentially kick-start this change process,"
they wrote in a note on Monday, while upgrading the stock to "buy"
from "neutral" on hopes for an overhaul. "We believe that status-quo
at GSK is unlikely to continue for long."
Potential actions by GSK to address poor investor returns could
include further cost-cutting and allocating more capital to
acquisitions of promising new drugs, rather than buying back shares.
A longer-term option might be to sell off the vaccines or consumer
health operations to unlock value.
[to top of second column]
DIVIDEND UNDER STRAIN
Friday's news that 15 months of Chinese investigations had been
resolved brought some relief as the fine, while a record for China,
was less than some investors had feared. GSK's former China head
also escaped without going to jail.
But the episode will have a long tail, with the pledges given by GSK
to ensure flexible prices and increase investment in local Chinese
production likely to drag on profits in the country.
What's more, the group still faces further probes and potential
fines in the United States and Britain, as well as bribery
allegations in Poland, Syria, Iraq, Jordan and Lebanon.
More fundamentally, investors are fed up that profit growth has been
delayed year after year and alarmed at the precipitate fall in sales
of its 15-year-old respiratory medicine Advair, particularly in the
United States where price pressure is acute.
Witty has been banking on new respiratory drugs Breo and Anoro to
make up the slack but sales to date have been slow.
Frustration boiled over when the company cut its 2014 earnings
outlook in July, triggering the biggest daily share price fall since
"People have come full circle and the glass is very much half-empty
now," said Deutsche Bank analyst Mark Clark, who believes U.S. sales
of GSK's top-seller Advair are likely to fall by more than 20
percent both this year and next.
Adding to anxiety is concern about the firm's fat dividend, which at
an expected 81 pence per share in 2014 offers a 5.6 percent yield.
The dividend is already equivalent to approximately 85 percent of
earnings and that figure could climb to more than 90 percent in 2015
once GSK divests older drugs with annual sales of around 1 billion
pounds ($1.6 billion).
Ditching these so-called established products makes long-term sense,
since their sales are declining, but they remain extremely
profitable, so a sale looks set to dilute earnings per share,
tightening dividend cover further.
While most analysts see GSK scraping by without cutting payouts,
yield investors are doing the sums carefully.
(Editing by Keith Weir)
[© 2014 Thomson Reuters. All rights
Copyright 2014 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed.