GlaxoSmithKline's spinoff plan is here—and it may not be limited to consumer health

GlaxoSmithKline GSK House in Brentford, UK
GlaxoSmithKline has initiated a two-year plan to prepare for the expected spinoff of its consumer health unit into a standalone company. (GSK)

GlaxoSmithKline made clear it intended to spin off its consumer health joint venture with Pfizer when the partners first unveiled the deal. Now, the British drugmaker has officially started a two-year journey toward that split, which may take prescription dermatology along with it.

Along the way, GSK will prepare to divide into two companies: one R&D-focused biopharma company and the other a standalone consumer health giant, the company said in its full-year earnings announcement.

“For the new consumer healthcare company, this program will support the build of the key technology infrastructure and of course in due course the corporate functions necessary to operate as a standalone company," CEO Emma Walmsley said Wednesday on the company's earnings call with analysts.

As part of that preparation for its planned consumer health split, GSK is launching a strategic review of its prescription dermatology business for potential spinoff, too.

For now, dermatology is part of GSK’s established pharmaceuticals franchise. In 2019, it registered sales of £445 million ($580 million), up 3% at constant currencies.

Considering a future for dermatology alongside the planned consumer health spinoff makes sense in that skin health prescription brands often find themselves competing against over-the-counter consumer products.

For example, Bayer previously managed its prescription dermatology unit under the consumer health umbrella before selling it to Leo Pharma. Novartis’ Sandoz is also in the process of divesting its U.S. branded dermatology business, along with some U.S. generic oral solids, to India’s Aurobindo Pharma.

RELATED: JPM: Pfizer, GSK execs talk up contradictory scenarios for hiving off consumer JV

How exactly GSK plans to hive off the consumer JV is yet unknown. At this year’s J.P. Morgan Healthcare Conference, Pfizer chief Albert Bourla and GSK’s chief strategy officer David Redfern offered up seemingly contradictory separation paths.

While Bourla talked about an IPO within three to four years, Redfern told Bloomberg his company hasn’t decided anything. Rather than a straightforward IPO, Glaxo had previously said it intended a de-merger of the JV to GSK shareholders and then a listing on the U.K. equity market.

All told, GSK expects the two-year spinoff program, internally known as Future Ready, to cost £2.4 billion, with £1.6 billion of that in cash, the company said. GSK has already kicked off a sale process of some noncore consumer products potentially worth £1 billion to help cover the cash costs, including the Latin American portfolio and several European drugs.

RELATED: GSK preps for Pfizer consumer health JV with £1B in product sell-offs: report

In addition, onetime costs for the separation are estimated at around £600 million to £700 million. Through the program, GSK is targeting £700 million in annual savings by 2022, with “improved operating performance” from then on.

“Consumer standalone can support higher debt levels, thereby deleveraging Pharma/Vaccines to <1.5x then enabling investment for growth," Jefferies analyst Peter Welford wrote in a Wednesday note to clients.

The new GSK-Pfizer consumer JV, which officially came into being at the end of July, did post growth in 2019. During the year, it generated sales of £9.0 billion ($11.7 billion), increasing 2% on a pro forma basis. And that included a 1 percentage point negative impact from divestments and phasing out of low-margin contract manufacturing.

Oral health was the bright spot, which grew 7% to £2.7 billion. The drag? Skin health. It declined in mid-single digits on a pro forma basis, “largely due to divestments of small tail brands in the U.S. and U.K.”

Last year, GSK sold five skincare brands in Europe and other regions to Germany’s Stada. Wrapped in the deal were itch relief cream Eurax and antiseptic cream Savlon, among others.

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