GSK has become bold, dare investors follow?

GSK’s deal is a bold move, allowing the company to focus on the area with real growth potential. But should investors follow GSK into the great unknown?

Article updated: 21 December 2018 10:00am Author: Michael Baxter

Five years ago, the embattled UK pharmaceutical giant was AstraZeneca. Then along came Pfizer and offered £69.4 million for the British company. The US company was turned away. Was that the right decision? We don’t do enough looking back in my view, how can we learn if we don’t examine past decisions when sufficient time has elapsed to make a fair judgement? Well, the AstraZeneca share price is up by around a half, from the period immediately before the Pfizer bid, and its market cap is now £75 billion. Remember, it has paid dividends since then. I think we can now say it was right to turn down Pfizer’s overtures.

Mind you, Pfizer has done okay, shares up by a third since its thwarted bid.

But what about GSK?

Alas I reveal a tale of woe. Over the last five years its shares have fallen by about ten per cent.

The opportunity that GSK lacked the courage to grasp

In fact, if you are a long-term investor then I have some bad news, right now GSK shares are around a third off the 1999 peak.

Part of the problem has been the two sides of the company.

There has been consumer products — safe, mature, high dividend paying and about as sexy as a lump of wood.

Then there is the bit that is about pharmaceuticals, vaccines, R&D — that really does have the potential to be exciting.

If you are a regular reader you will know I passionately believe technology is getting close to revealing some stunning breakthroughs. There is genome sequencing, personalised medicine, AI, nanotechnology, stem cell technology and maybe the most exciting one of the lot — CRISPR/cas 9, technology that makes it possible to edit DNA.

The convergence of these technologies will create an extraordinary revolution. Companies that can take advantage of this will excel.

GSK itself has been investing in bioelectronics, via a joint venture with Alphabet subsidiary Verily into a company called Galvani Bioelectronics R&D.

Do you recall the movie ‘The Fantastic Voyage?’ It was a science fiction movie made in 1966 starring Raquel Welch, about a miniaturised submarine injected into a human body trying to save a man’s life. Well, the combination of nanotechnology and bioelectronics, supported by AI, could do something similar — sending a tiny vessel into the human body and using electronics to stimulate specific areas of the body. GSK has worked on something similar to that.

At the time of the formation of Galvani Bioelectronics R&D, Kris Famm, President of the joint venture said: “Our aim is to pursue a relatively new scientific field that could one day result in a new class of medicines that would not be pills or injections, but miniaturised, implantable devices that harness the electrical language of the body to treat disease.

“We believe that small electrical devices could be programmed to read and correct the electrical signals that pass along the nerves of the body, including irregular or altered impulses that can occur in association with a broad range of diseases.”

Will the Galvani venture work?

I hope it does, but for me the venture illustrates something more important. GSK was trying to innovate, and you only manage that through experimenting — and all good R&D companies understand that failure is an important part of the process.

GSK’s problem is that the wider investment community don’t understand the potential that will be realised from the convergence of new technologies once they reach a level of appropriate sophistication.

GSK was held back

Now the company has agreed a deal to set up this monster of a consumer products company.

What does this mean for the rest of GSK — aside from its 68 per cent stake in the new company, which is expected to be separated off in three years?

As The Share Centre’s Helal Miah said: the deal “should leave the remaining pharmaceuticals division with less leverage and enable it to invest further into R&D to develop its portfolio of drugs further.”

For years, held back by conservative shareholders, the company was too timid to fully grasp the technology opportunity. But when she took over as CEO of GSK in the summer of 2017, Emma Walmsley, said that she was looking for “courage” from staff.

The trouble with courage is that it can lead to disaster; after-all it wouldn’t be courage if there was no risk. Do investors have the courage to follow GSK as it seeks to take advantage of a potentially massive, but unproven opportunity?

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.