Will Someone Take GlaxoSmithKline Out Of Its Misery?

| About: GlaxoSmithKline (GSK)
This article is now exclusive for PRO subscribers.

Summary

GlaxoSmithKline is cutting its research staff again, admitting its strategy of empowering scientists failed.

GSK's CEO is a scientist who has shown himself not to have the business instincts his job demands.

Investors can either wait for a takeover or take their losses.

GlaxoSmithKline (NYSE:GSK) has announced a reorganization that will cut over 900 research jobs in North Carolina, but the real failure began six years ago.

The problem is Dr. Moncef Slaoui, then the company's head of research and development. According to John Carroll at Fierce Biotech, Slaoui decided six years ago that the company's scientists should stop doing science, and focus instead on drugs with Return on Investment, or ROI potential. Carroll's story adds that Slaoui also broke the company's big research teams apart and said that researchers should "gamble their careers" on the drugs they worked on.

This sounds good, if you don't know science, or scientists. Because scientists don't get into science for ROI. They don't get into science to "gamble their careers" on a clinical trial. They go into science to do science. They go into science to learn things, to discover things, to help mankind. What Slaoui wound up with, instead of a bunch of entrepreneurial scientists, was a bunch of backstabbing neurotics.

And it shows. Some of his people gambled on home runs like a "cancer vaccine" called MAGE A-3 or a heart drug called darapladib, which failed. Others focused on hitting singles, getting drugs into the marketplace that worked, but didn't make big money.

Scientists aren't businessmen. Scientists are scientists. Last year Slaoui passed his baton on to his number two, Patrick Vallance, and went back to his original work in vaccines. But the damage had been done.

Vallance found himself with a demoralized, underperforming research group, with 14.5% of sales delivering nothing of substance. The oncologists went off to Novartis NVS in an asset swap. Some of the people being "let go" in this shakeup will go to Parexel, a clinical research organization. Some will be going to other Glaxo research offices in Philadelphia and Stevenage, in England. Vallance is doing the best he can with a bad hand.

But it's shareholders who are really holding the bag. While other pharmaceutical makers, like Pfizer (NYSE:PFE) and AstraZeneca (NYSE:AZN), are up over 60-70% in the last five years, GSK has managed a gain of just 8%, and that was cut further Thursday with the stock off another 1.76%. It is now pushing off twice as much in dividends, $0.19 per share, as it's getting in net income, $0.08. The company's sales have been stair-stepping down for years, from $28.4 billion in 2010 to $26.5 billion in 2013, as its market-leading drug for asthma, Advair, went off-patent. Its sales staff has been accused of corruption repeatedly, most recently in China.

Most of GSK's top executives are in their early 50s, but if they're incompetent what difference does it make? The company's market cap, $111 billion, made it a poor candidate for a takeover, especially with its poor pipeline of new drugs.

GSK has been ducking a takeover, which should be its Plan A. AstraZeneca made a run at the company, as a way to stave off Pfizer, leading a charm offensive by CEO Andrew Witty playing on patriotism to keep the company British, using the tie-ups with Novartis (NYSE:NVS) as a distraction. There are reports that the company could be Pfizer's Plan B (it had also been trying a takeover of AZN), but recent efforts by the U.S. government to stop companies from migrating overseas for tax purposes may have scotched that deal.

Witty, 50, who is also chancellor of a British university, has shown himself to be distracted from marketing, incompetent at mergers and stuck with a terrible research strategy. He has been CEO since 2008 and has to take the blame for what has gone on. The real problem is that he is, at heart, a scientist, in a job that requires a cutthroat entrepreneur.

My feeling is that you can hold your shares in hope of a Witty replacement, or a U.S. takeover, or you can take your losses and get out now.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.