Glaxo/Pfizer Consumer Healthcare Joint Venture Spin-off Notes

July 1, 2021 Update

Good article on consumer health market and potential consolidation.
Elliott Letter to GSK

June 23, 2021 – Update

GSK recently hosted its analyst day (with a 129 page slide deck!).
Some key details:
- The spin-off will happen by the middle of 2022 (consistent with prior guidance).
- The dividend will decrease by 31% on a combined basis. GSK RemainCo will distribute 40% to 60% of its earnings (down from ~80% currently).
- GSK will spin-off 80% of its stake in the Consumer business.
  - Prior to spin-off, it will receive a 8BN pounds.
  - Shortly after the spin-off, it will monetize the remaining 20% stake in the business that it owns.
Remainco outlook:
- GSK’s goal is to grow revenue by 5% annually and profit by 10% from 2021 to 2025. This is above consensus expectations.
- Dolutegravir patent expiry in 2028.
- Leverage will be up to 2.0x (net debt to EBITDA).
- Want to increase operating margin from mid 20s to >30%.
- Spend how much on R&D?
Spin-off outlook:
- As a reminder, the consumer spin-off is a JV between Pfizer and GSK.
- GSK owns 68% of the JV. Pfizer owns the remaining 32%.
- GSK has been optimizing the consumer spin-off. For example, it has divested/reviewed for divestiture several brands.
- In 2020, core sales (excluding divestitures/brands under review) grew 4%.
- Core sales are 9.5BN pounds. Consumer operating margin is 22.1%. Imples 2.1BN GBP of operating profit.
- Jefferies estimates the consumer JB is worth 46BN which implies a 22x EV/EBIT multiple. (PG trades at 23x).
- Spin-off will have leverage of up to 4.0x net debt to adjusted EBITDA.
On a SOTP basis, I think GSK is worth ~$52, ~30% upside.

I think the options may be more attractive than owning the stock.

I did a Twitter thread with more details here.

February 3, 2021 – Update

Article arguing GSK is undervalued.
Spin-off won’t become publicly traded until July 2022
This a good article diving into what the consumer business should be valued at.
- Author argues GSK share of consumer business should be worth 35.7 billion GBP assuming it trades at P&G’s multiple.

- He values the pharma and vaccine business at an EV/EBIT multiple of 17x which yields an enterprise value of 122.3 billion GBP.

- Factoring 23 billion GBP of debt and fair enterprise value is ~158 billion GBP versus current enterprise value of 94 billion GBP.
- Looks interesting. In the meantime GSK pays a 5% dividend.
- Using the assumptions above, looks like there is almost 100% upside. I need to double check all these assumptions, but it looks interesting.

December 16, 2020 – Update

Good Seeking Alpha article arguing that GSK is undervalued.

December 19, 2019 – Update

On December 19, 2018, GlaxoSmithKline (GSK) and Pfizer (PFE) announced that they would be merging their consumer health businesses into a joint venture. The joint venture is expected to close in the second half of 2019.
Within three years of closing, the joint venture will be spun off into a separate public company. The joint venture will have sales of $12.7BN. GSK will have a 68% controlling equity stake while PFE will own the remaining 32%. The combination will bring together a large category of consumer health brands, including GSK’s Sensodyne, Voltaren and Panadol and Pfizer’s Advil, Centrum, and Caltrate.
The Joint Venture will be the global leader in OTC products with a market share of 7.3% ahead of its nearest competitor at 4.1%.
Overview of transaction.