Elliott ups pressure on GSK’s top echelon

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Activist investor Elliott Management has urged British drugmaker GSK to consider a change at the top, a full divestment of its consumer healthcare business, higher profit margins targets, and stronger performance incentives, reckoning these and other measures can lead to a 45% increase in the stock price in the near term.

In a 17-page letter published on Thursday, Elliott said GSK has “a poor record of operational execution and value creation,” shortcomings the activist argued have kept the drugmaker’s stock underpriced for more than a decade.

To correct this situation and unlock GSK’s “true potential,” Elliot said the drugmaker must start with a process to determine the “right leadership” for the task ahead.

Elliott wants GSK’s board to add new members and launch a “robust” process to determine if chief executive Emma Walmsley is the right person to lead the company after next year’s demerger of its consumer healthcare unit. The activist said it was ready to present a list of such candidates.

The activist with $44 billion in assets under management said GSK should “display openness” to value-maximizing pathways such as an outright sale of its consumer healthcare division. The “substantial” proceeds from such a deal would allow GSK to accelerate the funding of increased R&D at the remaining business, prescription medicines and vaccines, pay down debt and launch a share buyback, Elliott said.

The investor also recommended GSK set an operating profit margin target of 32% by 2026, from 30% under the current strategy, and continue prioritizing R&D by increasing such investments “meaningfully” above its investment levels of the past decade.

On remuneration, Elliott argued for stronger performance incentives, arguing a “substantial” portion of the compensation plan be linked to financial targets to encourage the achievement of more ambitious goals.

The activist does not want to see GSK’s pharma and vaccines operations fully integrated, “because we are not convinced that ‘clear synergies’ exist between the two.”

Elliott said these steps would reduce the “credibility gap” plaguing GSK in recent years and possibly prop up the stock by 45% in the lead up to the demerger, and “much more in the years beyond.”

GSK is set to spin off its consumer healthcare venture division to shareholders by the middle of 2022 and expects an 8 billion pound ($11 billion) windfall from the move, funds the U.K. company intends to use to bolster its drug pipeline.

Elliott’s apparent push for a new management team comes after speculation the activist was concerned Walmsley may not be adequately equipped to run the slimmed-down GSK, considering her background in consumer health.

Shares in GSK were up 0.4% as of 10:38 a.m. BST Thursday.