GSK: Hard choice

GlaxoSmithKline chief Andrew Witty is taking the right decisions. And he had better be: his company remains in a very tough situation.

The centrepiece of the strategy update that GSK presented on Wednesday, along with first-quarter results, was news that the company would not, as previously mooted, sell part of its HIV drugs unit. An IPO could have raised $10bn. A wise choice all the same. What GSK most needs is not cash, but growth. The HIV unit grew sales 15 per cent last year and faster still in the first quarter - better than any other unit.

This comes on top of another bit of sagacity. GSK's recent asset swap with Novartis shifted the company away from pharmaceuticals, in particular oncology, and towards vaccines and consumer healthcare. Many other companies are headed the other way, excited by breakthrough products in, for example, Hepatitis C and immuno-oncology. Mr Witty foresees pressure on the prices of speciality drugs. He may be right; drug prices have the attention of insurers, politicians and the media in the US, where the industry makes most of its money. But Mr Witty's approach is in any case the conservative one. Given that GSK's investment case is built around its dividend, conservatism is required.

GSK also touted that the company will grow sales and earnings per share - slowly - between 2016 and 2020. That sounds an improvement on recent performance. But recall the context. Profits will fall sharply this year, as the company digests the asset swap. This means three years or so until profits pass last year's level. And, of course, cash profits will be worse still - the "core" earnings number that will grow starting next year excludes the costs of restructuring. Free cash flow fell sharply last year, and did so again in the first quarter. Hence the final big piece of news: that the dividend would not grow until 2018. Better than a cut, of course, but something a company with very tenuous growth prospects would say. That is what GSK remains.

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