GlaxoSmithKline PLC CEO Andrew Witty will retire in 2017 after nine years at the helm and 31 years at the company, opening the door to the possibility of broader change in the form of large-scale M&A or a consumer product business spin out.

Some investors have advocated for breaking up the business recently, while Witty has been in favor of diversification as a strategy to navigate the company through a challenging period for its pharmaceutical business.

GSK announced in its annual report March 17 that Witty will retire on March 31, 2017, and that the company has launched a formal search for his successor, including internal and external candidates.

“The new CEO may well cut dividends and divest consumer to restore GSK’s firepower for deals,” Societe Generale’s Florent Cespedes speculated.

The leadership change comes as many investors have grown restless with the company’s stagnant growth and Witty’s slow and steady leadership style. The announcement, therefore, isn’t an enormous surprise. But the one-year timeline will allow Witty to retire at a strong point, with GSK’s pharmaceutical sales forecast to return to growth in 2016 and consolidated revenue to grow low-to-mid-single digits ([A#14150506003]). It will also provide the time needed to appoint a successor as GSK hasn’t had a clear contender waiting in the wings.

Witty’s Nemesis Is Advair

The cloud that has followed Witty over what will have been nine years as CEO is Advair Diskus (fluticasone/salmeterol), the blockbuster asthma drug that has filled the company’s coffers but also has been an overhang. Advair has been so successful that the threat of a potential generic entrant has long weighed on the stock and the minds of investors.

For years Witty downplayed the possibility of a generic because of the high barrier to entry for respiratory products. His strategy was to bring forward a new portfolio of next-generation products that together would make up for the loss of Advair by the time a generic might be approved.

On that front, he partly succeeded, getting several new respiratory drugs to market ahead of a generic Advair, products like Breo Ellipta (fluticasone/vilanterol), Anoro Ellipta (umeclidinium/vilanterol) and most recently the first biologic for severe asthma, Nucala (mepolizumab) ([A#14151104009]).

But those drugs, launching into crowded therapeutic categories against entrenched rivals, chief among them Advair, have been slow out of the gate. Breo and Anoro together only generated about $500m in 2015 versus Advair’s $5.38bn in sales. Sales of Advair were down 13%, meanwhile, as competition has increased and payers have pushed back on pricing.

The threat of a generic has grown more real now that Mylan NV announced in January that it filed a generic version of Advair; it was accepted by FDA with an action date in early 2017 ([A#14160203001]).

Outside of respiratory, GSK has faced several R&D setbacks, notably in cardiovascular disease. Witty had to overcome other challenges too during his lengthy tenure as CEO of GSK – the sudden loss of the mega diabetes drug Avandia (rosiglitazone) in 2010 due to a cardiovascular safety issue that was later shown not to exist and a bribery scandal in China in 2014 (Also see "FDA Keeps Avandia On The Market But Looks To RECORD For More Clarity On CV Risk" - Pink Sheet, 23 September, 2010. and [A#14140922004]).

The March Toward Diversification

As the realities facing GSK’s pharma business have set in, Witty has focused increasingly on diversification to see the company through the challenging period in pharma, relying on vaccines, consumer healthcare and the ViiV HealthcareHIV joint venture with Pfizer Inc. and Shionogi & Co. Ltd. to drive growth.

Perhaps the biggest legacy he will leave behind will be the multi-asset swap he orchestrated with Novartis AG in 2014, when the company acquired Novartis’ global vaccines business for $5.25bn and divested its oncology business to Novartis for $16bn, while also forming a consumer healthcare joint venture with the Swiss firm Also see "Swapping Assets Now Down To Execution For GSK And Novartis" - Pink Sheet, 2 March, 2015..

That transaction, which closed in March 2015, was an innovative deal for a CEO that has eschewed large-scale M&A. The deal got the company through a challenging year last year, driving top-line growth.

Witty has grown increasingly outspoken about diversification as a long-term strategy, but some investors aren’t so sure commodity businesses like vaccines and consumer healthcare make up for the gap in innovative pharmaceutical R&D. They have been pushing the company to consider divesting or spinning out the consumer health care business, which could help fund large-scale M&A on the pharma side.

The company’s stock price is down 25.6% versus where it was trading one year ago, highlighting investors’ dissatisfaction with the status quo.

The consumer health care JV, which GSK majority owns under the deal with Novartis, is the company’s second largest revenue-generating business, well behind pharmaceuticals. The business generated £6.03bn in 2015, while pharmaceuticals and HIV together generated £14.17bn. Vaccines is GSK’s smallest business unit, generating sales of £3.66bn.

Given the link between pharmaceuticals and vaccines, divesting the vaccines business is viewed as less likely than a sale of consumer healthcare.

During the company’s fourth-quarter sales and earnings call in February, Witty acknowledged for the first time the “optionality” that the consumer health care unit provides, but said the company would be unlikely to consider a sale until after it absorbed the integration and any decision would be at least two to three years out.

Analysts were split on what kind of change a new leader might usher in. In a same-day note, Deutsche Bank analyst Richard Parkes said, “We see it as possible that a new CEO prioritizes M&A to bolster its pharma business putting the dividend at risk.”

“While this could be funded by a sale or spin out of consumer, we view this as unlikely as it would leave any new CEO exposed to the pharma division’s weak pipeline unless a transformational deal was tied to this,” he said.

Parkes said any new strategy will more likely represent an evolution of the current one rather than big change.

But Societe Generale’s Florent Cespedes was far more bullish on a sale. Discussing breakup scenarios in a same-day note, he said, “We think consumer alone is a credible candidate with Novartis the obvious buyer.” The team suggested Novartis could pay £18bn for GSK’s stake.

“The new CEO may well cut dividends and divest consumer to restore GSK’s firepower for deals,” he said. A sale of consumer to Novartis is most likely already priced into the stock, he added.

As for whom the new CEO may be, that is a question for which there is no obvious answer. There is no heir apparent at GSK, though CFO Simon Dingemans or President-Global Pharmaceuticals Abbas Hussain could be contenders. The company may just as well tap a candidate from outside the company, with Novartis Pharmaceuticals CEO David Epstein cited by some industry observers as an alluring choice.

The early announcement leaves plenty of time in the coming year for investors to debate about who is the best person for the job and what steps they should take to shake things up at GSK.

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