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Change on the way for GSK
May 2016
by Jeffrey Bouley  |  Email the author
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LONDON—GlaxoSmithKline (GSK) is, of course, a huge name in pharma—its CEO, Sir Andrew Witty, is also a big name, not just for any successes that GSK enjoyed during his tenure at the top, but also for a number of scandals and bad press that have rocked the company over his near-decade as CEO—among them charges and fines for bribing doctors to prescribe GSK drugs and for marketing a number of top-selling drugs for unapproved uses. However, many investors and other market-watchers are hoping for a whiff of change in the air between now and next year, when Witty will retire from GSK.
 
In the publication of its 2015 Annual Report to shareholders recently, GSK plc announced that Witty had indicated to the board his intention to retire from the company in early 2017—he and the board subsequently agreed that will happen March 31, 2017.
 
Sir Philip Hampton, who officially stepped into the role of GSK’s chairman in May 2015, said: “Andrew’s retirement next year will represent the culmination of 32 years of service and leadership to GSK and the industry. We will thank Andrew more formally for his tremendous dedication and contribution next year. In the meantime, we will now start a formal process to appoint his successor, whilst also ensuring the group remains focused on execution of its strategy to drive growth and performance.”
 
All formality and politeness aside, there have almost no doubt been significant tensions in the executive offices and boardroom from at least the time that Hampton began heading up the board of directors. As Stephen Bailey, a fund manager at Liontrust Asset Management Plc in London, noted in an interview with Bloomberg in early 2015, just before Hampton began his chairmanship, “Mr. Witty is running out of time. He’s either got to deliver in the next 12 months or step aside.”
 
And a few months before Hampton began leading the board of GSK, the company took a large bite out of Witty’s compensation package.
 
“The announcement that Sir Andrew Witty is to retire is no surprise, and if anything, may have happened earlier. GSK has not in recent years returned the results that many investors were hoping for and, along with its challenge in China, appears sleepy,” says John Lyon, a professor of practice at Warwick Business School who has worked in the pharma industry, at one point as global vice president for Covance. “The search for a new CEO has been afforded due time, and there is certainly a lot for a new CEO to get their teeth into. Large pharma needs to continue to reengineer itself, taking costs out of the organization while supporting its research and development, and sales and marketing departments.”
 
Getting a bit more specific and perhaps telegraphing what he’d like to see Witty’s successor tackle, Lyon continued: “Relationships between large pharma and the outsourcing of its medicine development through contract research organizations has matured in the past couple of decades and more strategic links may be possible going forward. Gone are the days when pharma had the luxury of resource to support large middle management structures and a move to a more lean and mean HR structure will continue.”
 
And while analysts are generally happy with GSK at the moment, earnings-wise, the company having reported a good first quarter in its quarterly financial report at the beginning of May, the desire for change is clear.
 
Writing for Forbes about Witty’s departure, attorney  Erika Kelton bluntly stated that “Corruption, bribery, illegal marketing, contaminated drugs and collusion are some of the ‘highlights’ of Glaxo’s business practices that were revealed during Witty’s nine years at the helm,” adding that the company made headlines for all the wrong reasons when he was in charge, and arguing against the hiring of any internal prospects at the company to succeed him.
 
But, again, the news isn’t all bad. Past problems aside and whatever tarnish Witty’s armor may bear at the moment, Seamus Fernandez and fellow analysts at Leerink Partners said of the Q1 earnings: “We are encouraged by GSK’s strong 1Q sales across its business units and geographies,” and noted that, boosted in large part by an improving consumer healthcare business, “GSK should deliver on its updated FY guidance of 10 to 12 percent core EPS growth at constant exchange rates.” Leerink is particularly encouraged by the respiratory and HIV directions at GSK right now.
 
Still, Fernandez and colleagues can’t get away from Witty’s legacy and departure, either—and there remain some long-term concerns.
 
“With GSK’s base business stabilizing but a largely absent near- to medium-term pipeline, investor interest is growing around CEO succession plans,” they wrote in April. “In our view, GSK’s leadership position in consumer healthcare (CHC) and the need to efficiently and effectively operate this business as a source of upside suggests that at least one direction could be toward a CEO with management expertise in CHC. Further, we believe the mixed results coming out of the various research 'DPUs' [discovery performance units] suggests strong and more centralized R&D leadership may be necessary to drive GSK’s culture toward one of more effective risk-taking that includes M&A if the company is going to deliver significant new biopharma innovations.”
 
As for Witty himself, he had this to say along with the announcement of his upcoming retirement: “GSK is a very special company with an inspiring mission and many dedicated people. By next year, I will have been CEO for nearly ten years and I believe this will be the right time for a new leader to take over. In making this decision it has been important to me that the board have the time to conduct a full and proper process and that we sustain the momentum of our current business performance, capitalizing on the very significant progress we made last year to strengthen the group. By doing so we will strongly position GSK to achieve the medium-term outlook set out to investors last year and deliver a return to core earnings growth in 2016.”
 
Code: E051628

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