GSK drops plans for IPO of HIV drugs unit

GlaxoSmithKline has dropped plans to sell part of its HIV drugs unit and promised to hold its dividend steady for the next three years as the struggling UK pharmaceuticals group set out its strategy to revive growth.

The u-turn on a proposed multibillion-pound initial public offering of the ViiV Healthcare unit was the biggest surprise in a closely-watched presentation by Sir Andrew Witty, chief executive, aimed at shoring up investor confidence in the company and his leadership.

Sir Andrew floated the idea of a flotation for ViiV last year as a way to unlock value for GSK shareholders in what would have been among the biggest UK IPOs on record. He said on Wednesday it made more sense to keep the business because its growth prospects were stronger than anticipated.

The decision came as he set out his plans for turning GSK round after a period of falling sales for its crucial respiratory drugs in the US and a bruising corruption scandal in China.

Earnings were forecast to drop by a high-teens percentage this year - more than analysts had expected - but Sir Andrew said growth would return next year and rise by a compound annual rate in the mid-to-high single digits between 2016 and 2020.

This followed a $20bn asset swap with Novartis completed this year that has shifted GSK's emphasis towards vaccines and consumer healthcare and reduced its dependence on pharmaceuticals.

Sir Andrew said GSK was making a bet that price pressures were going to increase in the prescription drugs market in the US and Europe because of fiscal constraints and strains on healthcare systems from an ageing population.

He acknowledged that this was a contrarian view at a time of rising investor enthusiasm about the industry's strengthening research and development pipelines. But he said "the weather is turning" against expensive speciality drugs and that GSK would benefit in the long run by shifting towards high-volume, steady-growth markets such as vaccines and consumer health.

This was a "very fundamental shift" by GSK away from a business model focused on high-priced drugs for 500m-600m people in the US and Europe, towards one better equipped to serve growing demand from emerging markets, Sir Andrew added.

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A £1bn cost-saving programme would be accelerated to deliver its full benefits a year early in 2016 with total annual benefits of £3bn from restructuring and synergies by 2017.

This allowed GSK to commit to keep its dividend stable at 80p for each of the next three years to 2017. However, a proposed return of £4bn in capital to shareholders after the Novartis deal was reduced to £1bn as a special dividend.

Fears over possible decline in GSK's hefty dividend, which delivers an annual yield of 5.29 per cent compared with an average of 1.7 per cent for the European pharmaceuticals sector, had weighed heavily on the group's shares in recent months.

First-quarter sales were up 1 per cent from last year when adjusted for currency fluctuations at £5.6bn and earnings per share were down 16 per cent at 17.3p. This was slightly below analysts' consensus expectations.

Shares in GSK closed up almost one per cent to £15.14. Before Wednesday, the stock had fallen almost 8 per cent in the past year compared with a 16 per cent rise in the broader pharmaceuticals sector.

Analysts and investors broadly welcomed Sir Andrew's presentation. "The dividend is safe, and the long-term guidance points to a sustained recovery," said Mark Purcell, an analyst at Barclays.

However, Damien Conover, analyst at Morningstar, said doubts remained over GSK's ability to meet its new growth targets and sustain its dividend because of decline in the best-selling Advair asthma drug and slow take-up of new products that were supposed to replace it.

"We still think Glaxo has the highest risk of a dividend cut in big pharma," he said.

John Lyon, a professor at Warwick Business School and former pharma industry executive, said GSK was "pinning [its] hopes on a turnaround of fortunes from 2016 onwards, while ongoing restructuring seeks to take redundant costs out the business". But he questioned whether Sir Andrew would be given time to see the strategy through.

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