Neil Woodford is perhaps the most respected British fund manager of his generation. His record is remarkable, considering that most of his investing wins have been achieved during the post-millennial bear market.
So when he says GlaxoSmithKline (LSE: GSK) should be broken up, people sit up and listen. But ishe right?
What a carve-up!
Well, lets dig a little deeper. I have said in previous articles that Big Pharmas future is more complex than you think. To be successful in the drugs industry, you need to fight a battle on several fronts, developing chemical drugs, blockbuster biological drugs, over-the-counter medicines, and expanding into emerging markets.
So, in principle, you could break GlaxoSmithKline up. Woodford has talked about four separate companies. Perhaps you could have a company based on patent-expired, low-cost medicines, competing with the likes of Israeli generics manufacturerTeva. You could also have a business focussed on branded, healthcare consumer goods, run along the lines of a Reckitt Benckiser.
The bulk of GSK would take the form of a research-intensive firm with the aim of selling the next drugs blockbuster, say like AstraZeneca.Finally, you would have a company thatexpands intocountries such as Brazil and India, selling low-cost, effective medicines tailored to individual markets. A sort of Hutchison ChinaMeditech.
It seems an attractive idea, but Im not sure it would yield much value for increasingly impatient GlaxoSmithKline shareholders. I just wonder if this is the type of reflex reaction that most fund managers have when one of their main investments under-performs. Neil Woodford is one oftheBig Pharmasstrongest backers, and has poured money into Glaxo, but with little return as yet.
If your investmentisnt broke, then dont fix it. But if it is doing badly, maybe something does need to change.
The ties that bind
Yet I see a common strand thatruns through this company, and which should be enough to bind GSK together. That strand is research. Whether you are developing a generic formulation tailored to an emerging market, a new cold remedy to be sold over the counter, or a high-margin, expensive anti-cancer treatment to compete with the likes of Herceptin, you need to innovate.
Thisresearch can take many different forms, and involve a range of expertises, but it is innovation all the same.
I still believe GlaxoSmithKline canperform well, but it has many challenges ahead of it, including the increasingly crowded pharmaceutical marketplace and the growing popularity of generics. But it has to keep on trying.
In my mind, it is notabout changing what it is doing. Instead, it is about doing it better.
I think GlaxoSmithKline could prove a worthy addition to your high yield portfolio. Income investing is the at the heart of many small investors’ strategies, as it allows you to steadily accumulate and reinvest dividends year-by-year, gradually building your retirement pot.
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Prabhat Sakya has no position in any shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.