Glaxo Investors Want CEO Who Can Revitalize R&D

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Glaxo CEO Andrew Witty recently announced plans to retire next March. ENLARGE
Glaxo CEO Andrew Witty recently announced plans to retire next March. Photo: Bloomberg News

As GlaxoSmithKline GSK -0.62 % PLC’s search for a new boss gets under way, one requirement ranks high on investors’ wish lists: someone who can breathe new life into its drug-development machine.

The company’s pharmaceuticals arm, which develops prescription medicines and accounts for around two-thirds of its £23.9 billion ($34 billion) annual revenue, has lagged behind many of its peers in recent years, according to investors. Glaxo has notched a total shareholder return of 60% over the past five years, compared with 107% for the S&P Global 1200 Health Care Index. For many, fixing this is seen as the top priority for the successor to Chief Executive Andrew Witty, who recently announced plans to retire next March.

The U.K. company has made recent efforts to highlight promising medicines in its labs, which it says could yield 20 new drugs by 2020. In November, Mr. Witty and other executives walked investors through Glaxo’s pipeline of new drugs at the company’s first so-called R&D day for more than a decade. The company is also upbeat about the prospects for some recently launched medicines in HIV and respiratory conditions.

But a number of high-profile failures in recent years, including darapladib, a heart drug it hoped would become a multibillion-dollar blockbuster, and MAGE-A3, an experimental treatment for lung cancer, have hurt the company’s credibility in research and development, according to some investors.

“The research and development organization of Glaxo is recovering from several painful and high-profile historic failures,” said Andrew Baum, an analyst at Citi. “It needs someone to inject a note of confidence and smart risk-taking.”

At the same time, Mr. Witty’s strategy of reducing Glaxo’s exposure to drug development by bulking up in vaccines and drugstore staples, from over-the-counter remedies to toothpaste, has raised concerns that the company is moving away from its historic core.

Neil Woodford, a prominent U.K. fund manager and one of Glaxo’s biggest investors, is one shareholder pressing for the company to focus squarely on developing and selling drugs. “He wants it to be a pharmaceuticals company,” said a spokesman for the fund manager. “He’s not in the consumer health-care camp.”

Joe Walters, manager of Royal London Asset Management’s UK Income With Growth Trust, which holds 0.8% of Glaxo, said it is important the new boss “comes with a strong scientific background” because a new blockbuster drug is the company’s best chance for increasing its share price. “Science is still the largest part of the group and will determine its success or failure,” he added.

“I would prefer somebody who has had some experience of R&D and who can make good long-term calls,” said another institutional investor. “Those calls don’t show up in yearly earnings but help sustain the business over time.”

Another issue confronting Glaxo’s new boss: deciding whether to break up the group, which was formed in 2000 by the merger of crosstown London rivals. Some shareholders, led by Mr. Woodford, have said spinning off the £6 billion consumer health-care arm could release value for shareholders.

For Mr. Woodford, that means hiring “a fresh pair of eyes” from outside Glaxo, a move which that would be a departure from the company’s tendency to promote insiders to top jobs. The company’s 12 executive team members have an average tenure of 16 years, and eight were promoted from inside.

Mr. Witty has said that while the consumer health-care unit is large enough to constitute a stand-alone company, it would be “unwise” to consider breaking it off until Glaxo finishes integrating a recent deal with Novartis AG NVS -0.48 % , a process that he said would take another two years.

Some shareholders pointed to Glaxo’s U.K. rival AstraZeneca AZN -0.26 % PLC as an example of how a research culture can be overhauled from the top. Pascal Soriot, who was hired from Roche Holding AG RHHBY -1.30 % in 2012, has “reinvigorated the R&D engine and brought in new talent,” said Dani Saurymper, manager of the AXA Framlington Health fund.

The Glaxo board last month said it would consider internal and external candidates to succeed Mr. Witty, who has spent more than 30 years at the company and is leaving at the age of 52. Under the company’s remuneration policy, the board may offer external candidates a bonus of up to nine times’ base salary for long-term performance as a joining incentive.

One outsider in the running is Geno Germano, a departing Pfizer Inc. PFE 1.03 % executive, according to several people close to the situation. A spokesman for Glaxo declined to comment on the matter.

In early February, Pfizer said Mr. Germano, group president of its global innovative pharmaceuticals business, would leave the giant drugmaker. His exit was announced along with the leadership plans for Pfizer’s now-abandoned merger with Allergan AGN 1.01 % PLC. Mr. Germano will depart despite the deal’s collapse, according to people familiar with the matter.

Some internal candidates highlighted by investors as strong contenders were Abbas Hussain, head of global pharmaceuticals; Jack Bailey, head of the company’s U.S. pharmaceuticals arm; and Roger Connor, head of global manufacturing and supply.

Glaxo “needs someone who can walk into one of the most challenging jobs in the U.K. at the moment, and can deliver,” said Ashley Hamilton Claxton, corporate governance manager at Royal London Asset Management.

Denise Roland at Denise.Roland@wsj.com and Joann S. Lublin at joann.lublin@wsj.com



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