Thursday, April 14, 2022

Miracles may not be in the pipeline at GSK but it’s too soon to panic | Nils Pratley

It was not a knockout quarter to put Elliott Management, the big, aggressive and newly arrived US activist hedge fund, back in its box. GlaxoSmithKline’s revenues fell 18% as patients, sensibly, delayed their GSK shingles vaccinations so they could be jabbed with other people’s anti-Covid juice.

That phenomenon will be around for a while and was expected, but weary shareholders may reflect (again) that there is always something at GSK. The cry: “Why can’t the company be more like AstraZeneca?” has been heard for half a decade for a reason. AstraZeneca’s shares have soared in the period; GSK’s have gone roughly sideways.

Elliott has not said how many shares or derivatives it has bought or what, if anything, it thinks management should do differently. But to think that the hedge fund is sitting on a cure-all alternative strategy seems fanciful. None of the ideas suggested by others for Elliott to push sounds compelling.

Accelerate the demerger of the £30bn-plus Advil to Sensodyne consumer healthcare division? Knocking a couple of months off a “mid 2022” timetable wouldn’t change anything.

Make the chief executive, Emma Walmsley, lead the consumer business, which she used to run, rather than stay with the “new GSK” pharma and vaccines operation? Unlike Pascal Soriot at AstraZeneca, she’s not a scientist. On the other hand, the City used to applaud the lab folk she has hired, including the pharma head Luke Miels, poached from under Soriot’s nose.

Spend less on research and development to boost profit margins? That would be hopelessly short-sighted. AstraZeneca was improved by boosting spending. Or separate pharma and vaccines and flip them to the highest bidder? The politics alone might make it impossible.

Walmsley’s best policy is to ignore the noise. The decluttering demerger plan looks sound and is supported by shareholders. The doubts – and thus the fear and excitement around Elliott’s arrival – relate to the quality of the pharma pipeline. Is “new GSK” fit enough to pursue Astra-style reinvigoration, or should it admit defeat and seek a partner?

Walmsley obviously believes the former and investors should give her (a little) more time to make the argument. The next critical step comes next month when GSK puts it pipeline on display and attempts to counter the perception of emptiness after a couple of setbacks in oncology. A revenue “outlook” for the next decade is promised. Miracles are probably not on the menu, but best to see the details before joining the Elliott-inspired mood of despair.

After four years in post, Walmsley hasn’t got for ever to perk up the share price. But remember that AstraZeneca was a slow burn for the first four years of Soriot’s reign. There may yet be a moment to panic at GSK, but it’s not yet.

Too soon for a return to ‘normal’ bank dividends

This time last year the question was whether banks were being sufficiently prudent as they took their first impairment charges to cover expected losses from the pandemic. Now it’s the other way around: how quickly can a portion of the provisions be reversed?

The answer at Lloyds Banking Group was a £459m release “given the UK’s improved economic outlook”, creating a net credit on impairments of £323m and bumper first-quarter profit numbers. Rapid vaccine rollout has worked wonders, not least for share prices. Lloyds, Barclays and NatWest have roughly doubled since their lows last spring.

The next cry from shareholders will be for a return of their dividends at pre-pandemic levels. In capital terms, Lloyds can certainly afford it – its core ratio is now 16.7%, well above target. But dividend power lies with the Bank of England’s Prudential Regulation Authority (PRA), which lifted its ban on shareholder distributions in February but set tight “guard rails” at the same time. For Lloyds, it meant a token payment of 0.57p per share for 2020.

The PRA could surprise us and say “do want you want” on dividends when it next opines in July, but it feels unlikely. The position on pandemic losses has clearly improved radically, justifying looser rails, but there are still obvious uncertainties.

For starters, there are possible Covid variants. More prosaically, the chancellor’s “pay as you grow” bounce-back loan scheme may be obscuring the true state of credit quality among SMEs. A return to “normal” bank dividends still feels like a 2022 event.

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