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GlaxoSmithKline gets shot in arm but M&A talk trundles on

Drug company boosted 2015 revenues and achieved better-than-expected dip in earnings

GSK's Witty said UK was much better off inside EU than outside it

Investors welcomed GlaxoSmithKline’s (LON:GSK) annual results on Wednesday but the jury remained out on whether the drug company was doing enough to ward off potential takeover interest.

GSK reported higher revenues in 2015 and a 15% fall in core earnings per share, ahead of market expectations.

The group blamed fourth quarter losses of £354mln in the quarter to December 31, compared with a £1bn profit a year earlier, on a higher-volume, lower-margin business following its $20bn asset-swap deal with Novartis last year.

It also pleased shareholders by confirming a 2015 ordinary dividend of 80p per share and special payout of 20p per share, with the latter to be paid beside the fourth-quarter ordinary dividend in April.

The shares rose 14p to 1440p as the company said its drive to develop new drugs and restructure itself into three divisions – pharmaceuticals, vaccines and consumer healthcare – was paying off.

Like rivals, GSK is facing pressure to develop new treatments to replace older drugs that are facing copy-cat competition as their patents expire.

It made £2bn from sales of new treatments last year, such as HIV medicines Triumeq and Tivicay and respiratory treatments Breo and Nucala.

It also said it expected to hit its £6bn target for new product sales two years earlier than planned, in 2018 rather than 2020.

On a conference call to discuss the results, chief executive Andrew Witty said: “New product sales are demonstrating good momentum and we’re seeing accelerations in uptake in our new respiratory portfolio.”

But analysts continued to speculate about whether the group was better off as a whole or whether it would make more sense to spin off parts of it – or even break itself up.

There has been speculation that the group could offload businesses such as HIV drug arm ViiV Healthcare.

Ketan Patel, associate fund manager at EdenTree Investment Management, which owns GSK shares, said: “The question for long-term investors is whether it makes sense to sell ViiV, the fastest growing business and the consumer healthcare division.

“The pipeline, with more than 250 products, remains a key driver, but needs to begin to deliver a return for long-suffering investors and fend off calls for a break-up.”

US research house Zacks pointed out that investors were aware that GSK established products such as Seroxat/Paxil, Combivir and Lovaza were facing generic competition and pricing pressure in major markets.

"In this scenario, investor focus remains on late-stage pipeline candidates and their commercial potential, restructuring and cost-cutting initiatives and performance of new products apart from the usual top- and bottom-line numbers," it said.

Better off together

Last June, there were claims in the market that the company’s lacklustre share price performance had made it vulnerable to a takeover.

The shares hit 1782p in May 2013 but have since tumbled to 1440p.

Market talk emerged at the time that GSK could face an approach from Roche of Switzerland (SWX:RO) or Johnson & Johnson (NYSE:JNJ) of the US at about 1900p per share, valuing it at more than £92bn at the share price then, which was about 1351p.

Earlier this week, rumours were doing the rounds again that GSK could break itself up or could be taken over and carved up.

There was vague speculation that the likes of Reckitt Benckiser (LON:RB.), Procter & Gamble (NYSE:PG) or Unilever (LON:ULVR) could snap up the company for its consumer health business and hive off the drug side to a more appropriate owner such as Roche.

Asked about a potential break-up in the call, Witty insisted that the company was better off staying together than splitting itself into its constituent parts.

He said: “When you look at the uncertainty of the general global environment, I actually think having a more balanced set of businesses is exactly the right course for us to be following and that is why we have obviously committed very hard to that now.”

Talking of break-ups, Witty also came out strongly in favour of the UK staying in the European Union.

He said: “We’re much better off inside the EU than outside it. I think it runs the risk of creating uncertainty, long periods of uncertainty, with no obvious route to a simpler world than the one we're in now.

“We regard Europe as a significant economic bloc, it is important to us from a regulatory perspective, but it also creates some levels of predictability.

“Could it be improved?  Of course it could be improved, we would encourage the government to work hard to improve it, but we believe it is better to be in and improving than to be on the outside and trying to plot a new course.”

Any bid for GSK would represent the latest attempt at sector consolidation following 2014’s failed effort by US giant Pfizer to take out UK rival AstraZeneca (LON:AZN).

A £32bn bid by AbbVie of the US to buy British drug-maker Shire (LON:SHP) also collapsed amid fears about a US regulatory crackdown on corporate tax avoidance.

Quick facts: GlaxoSmithKline PLC

Price: 1343.8 GBX

Market: LSE
Market Cap: £67.42 billion

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