Broken up? GlaxoSmithKline's real problem is getting eaten up by scandal

GlaxoSmithKline Chinese headquarters (Reuters)

Some of the blue has come off GlaxoSmithKline’s chips and even Sir Andrew Witty’s knighthood is looking a little tarnished as his share price tumbles and one of Britain’s most prestigious companies starts to look, well, mortal.

If GSK could just get the City talking about something other than bribery allegations in China and the unwelcome attention it’s getting from law enforcement agencies ranging from the Serious Fraud Office (ho hum) to the US Department of Justice (scary). Not to mention that unexpected profit warning.

Hence the GSK chief executive’s interview with the Financial Times in which he casually dropped hints that his next dalliance with deal-making investment bankers might just result in them cooking up a plan to break up the company he runs.

So far GSK’s contribution to the deal frenzy engulfing the pharmaceutical sector has been an asset swap with Novartis that handed Sir Andrew the Swiss firm’s vaccines business in return for GSK’s rather limited portfolio of cancer drugs.

They also bolted together their respective consumer healthcare arms, with GSK in the driving seat. Apparently its businesses have been left “stronger as individual components” with “enhanced optionality for the long run” as a result. If only one of the big pharma firms could come up with a cure for such corporate verbiage.

Despite this, Sir Andrew says he is “willing to accept” that the joint venture might ultimately deliver more by being cut loose as part of a break-up of GSK into its individual units.

Presumably that’s part of his “optionality”. It’s certainly got people talking about something other than profit warnings, bribery allegations and the falling market share of GSK’s top treatment. At least for a little while.

Deals have become the pharma industry’s favourite prescription for an illness it just can’t find a cure for: its inability to develop new treatments at a price to excite investors. So instead of blockbuster drugs, we have blockbuster mergers and acquisitions.

Sir Andrew’s words might have been peppered with corporate gobbledygook but they were carefully chosen and even produced a brief bump in the company’s share price. Unfortunately, encouraging a little deal chatter is a short-term palliative at best.

We’ll just have to wait and see if Sir Andrew’s wit goes hand in hand with the wisdom to cure GSK’s problems. At least he appears to recognise the folly of focusing on quarterly earnings at the expense of R&D spending. But ultimately some of that R&D needs to come good to get the company back to where it wants to be. Big beast it may be, but GSK could still get eaten up rather than broken up if it doesn’t.