GSK and Haleon will need time to thrive apart

Success for GlaxoSmithKline’s consumer health spin-off has to start with talking the new business down.

The UK drugmaker spent five hours on Monday trying to win analysts round to Haleon, as the spun-off entity is to be called. But for as long as Unilever’s failed bid sets the bar for valuation, it will be hard to clear.

Both GSK and Haleon are going to be measured by what Unilever offered — or didn’t — when its interest in the consumer health business was revealed in January. To have the £50bn Unilever did put on the table hanging over Haleon is bad enough. To have the £60bn that GSK was reportedly seeking but didn’t get is worse.

Sixty billion is not a helpful number. It would have included a chunk of takeover premium, on top of the synergies Unilever hoped to realise through marrying Sensodyne toothpaste with Dove soap.

Standalone Haleon won’t, initially, be valued at anything like that sort of money. It’s not even likely to be valued at £50bn. Somewhere in the middling £40bns seems more probable.

That leaves Haleon with some work to do to convince investors that GSK boss Emma Walmsley was right to rebuff the bid and that it’s exciting enough as an investment prospect in its own right. GSK, meanwhile, has to convince investors that after years of its shares treading water, it is finally about to put its pipeline problems behind it.

For so long at GSK, everything has been leading to the moment in July when Haleon is finally spun out. Fund manager Neil Woodford pushed for the group to carve itself up back in 2015 (he wasn’t wrong about everything). The company took roughly three years and a new chief executive to come around to the idea, and another three years and some readying for separation.

Now the split is about to complete, the focus switches to what comes next. And each investment case has its own problems. One suffers from potentially unrealistic expectations thanks to Unilever. The other faces rock-bottom expectations, but is yet to show it can exceed them.

Part of Haleon’s immediate excitement problem is that it gave away the big reveal for analysts ahead of time. Its sales growth target of 4-6 per cent a year would have been the focus of Monday’s capital markets day had GSK not been pushed into disclosing it in January as part of its defence against the Unilever bid. That left little scope for anything to set the investor community alight.

In time it can probably grow into the numbers that attached to it. It is expanding ahead of the wider market, and “modest” margin growth isn’t so bad when you’ve already doubled them. It has an attractive portfolio in vitamins, pain relief and oral health, is cash-generative — sufficiently so to offset worries about debt and rising interest rates — and has a solid top team plus ex-Tesco boss and Unilever man Dave Lewis in the chair. But the big excitement opportunity is the potential for two unnamed drugs to move from prescription to over the counter in three or four years.

For GSK, the more investors know about Haleon, the more scrutiny the rump pharma business attracts. The company likes to point to the progress it has made on its pipeline. Investors still think it has it all to prove. There are trials on the horizon that could go GSK’s way: its vaccine for RSV, a common respiratory virus, is the next big one. But it’s going to take considerably more than that to justify a re-rating of the shares — and of Walmsley.

The demerger will give GSK more options, thanks to a £7bn one-off dividend from Haleon and a lower debt burden. A fall in biotech valuations in recent months make deals more do-able too, though GSK will continue to find itself considerably outgunned by rivals such as Swiss group Roche.

More broadly, though, there is the fact that while conglomerates are unfashionable and demergers all the rage, history shows that in the first year at least the companies involved can have a bumpy ride. Bayer didn’t thrive immediately after it spun out Covestro. Nor did Siemens when it first shed its health division.

GSK may well follow that pattern.

cat.rutterpooley@ft.com
@catrutterpooley

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