Simon Dingemans
When Simon Dingemans became CFO of healthcare giant GlaxoSmithKline (GSK) in April 2011, he had a straightforward plan in mind: to put finance at the forefront of the business to contribute more directly to the execution of GSK’s strategy and improve the returns being delivered.
The one-time investment banker joined GSK in January 2011 before formally taking up the reins as CFO three months later. He brought to the company a quarter of a century of experience at investment banks such as S.G. Warburg and, most recently, Goldman Sachs where he was a leader of the European M&A business. That background not only gave him exposure to a wide range of companies across many industries and geographies, it also brought him into contact with GSK itself, a client he had worked with for more than 10 years before joining them.
He was, therefore, very familiar with the company’s mix of business — £18.7b (US$29.5b) of its £27.4b (US$42.3b) revenue comes from pharmaceuticals (respiratory, cardiovascular/urogenital, oncology and many other treatments); £3.5b (US$5.4b) from vaccines (against, for example, hepatitis, diphtheria, tetanus, influenza, HPV and rotavirus) and £5.2b (US$8b) from consumer healthcare (including Panadol, Sensodyne, Ribena and Horlicks).
Upon taking up the CFO post, he says that the key questions that needed to be answered were: “How do we get finance to do something quite different inside the company in terms of its engagement with the business? And how do we ensure finance is making a real contribution to both setting and delivering the strategy?”
Driving forward
This was an important mission for Dingemans. GSK may be in a different position to many of its rivals, having weathered much of the impact of the “patent cliff” and moved into a period of growth. However, like the rest of the global pharmaceutical industry, the company continues to face challenges on several levels. The state of government finances in the developed world and the growing costs of healthcare provision have not only impacted upon the prices which public healthcare departments and other payers are prepared to offer, it has also made them increasingly reluctant to give approval to new drugs unless there is sufficient differentiation from others already on the market.
“We need to continue to generate new products and new therapies that really add value as opposed to being the next one in an already well-covered category,” Dingemans explains. “Especially when even after approval is given, there is ongoing pricing and volume pressure from generic drugs which can enter the market at a fraction of the cost once the patent on an innovative drug has expired.”
Dingemans knew that finance could play an important role in battling against the bottom line impact of these pressures. From his perspective as an outsider who knew the company well, he saw a finance function that had been a follower of the strategy but not a leader of it.” He saw a chance for finance to be much more involved, to improve delivery and to help drive performance much more directly.
Addressing this involved getting the finance function to work much more closely in partnership with the commercial counterparts of the business. “This meant improving the quality of decision-making and focusing finance on driving the returns out of the strategy that we’ve laid out over the last two or three years,” says the CFO.
What he calls “a new financial architecture” was created to provide that focus for not only finance but also for the rest of GSK. In particular, it highlighted four key levers through which finance could align the whole organization. These were around “continued support for and investment behind driving top-line growth; adding operating leverage to that growth; improving GSK’s financial efficiency; and converting more of our earnings to cash.”
Shifting focus
Dingemans has been careful to make clear that he wants to build on the governance, controls and financial reporting skills that the finance function had hitherto as its main focus, and not leave them behind. Rather, he wants to “shift the focus and emphasis.” So how has he set about achieving this?
“You’ve got to create the space for people to be able to do that,” he says, “by providing additional resources, and by taking some of the standard and more process-oriented pieces of finance and simplifying them or taking them away and centralizing them.”
Helping to do that is a new central function called Core Business Services (CBS) — a global business unit that offers transactional services for a wide range of functions such as finance, HR, IT, procurement and facilities management. The CBS function is designed to help simplify a big company, to allow those people who discover, make and distribute GSK’s medicines to focus on that. On the finance side, it covers processes such as global financial reporting and analysis. By taking on these more standardized processes, CBS has become a key enabler for finance, helping to shift its focus and “reinvest its efforts in becoming better finance partners with the business.”
Finance at the forefront
Finance has now become “embedded” in decision-making, says the CFO. It has put in place a series of analytics to answer questions such as: which market should be prioritized? What is the pricing environment? What is the product reimbursement profile likely to be? How much investment should be put behind it? What returns are we generating?
“We’ve developed a much more differentiated approach to thinking about how and where new products should be launched.” That initiative started in Europe but is being rolled out across the group, including into emerging markets.
Another area where finance is helping to drive more effective analysis and decision-making is using its global footprint and reach across the different business units of GSK to share best practice. One particular example is how some of the analytics and returns comparisons used regularly by GSK’s consumer business have been successfully applied to the pharmaceutical side of the business. “We’re lifting between the businesses as well as differentiating within them,” Dingemans explains. “Finance has a role in making sure that decisions are being made on the specifics and the facts and keeping that framework current.”
The company is also taking a similar approach in building collaboration between its commercial business where, for example, there can be cross-promotional benefits between pharmaceuticals and consumer products. Early success has come in India, where consumer sales teams are able to explain to dentists the benefits of Augmentin, an antibiotic often used in dental care, alongside their more traditional coverage of Sensodyne, a toothpaste for sensitive teeth.
Returns on research
GSK is patently a business that depends on the success of its research and development (R&D) efforts. But apart from keeping score and backing the findings of its scientists, it’s perhaps not immediately apparent what role finance can play in the investment of capital.
A decade ago, there were some very big mergers in the pharmaceutical industry where, Dingemans says, “one of the key forces was the perceived need to upscale the ability to invest in R&D and put more resources in.” The hope was that greater backing would produce new, big-selling drugs.
However, he feels that this approach has demonstrated that perhaps it is not the “most productive way to access genuine innovation.” GSK is following a different approach, “breaking down some of the industrial infrastructure” to create more flexible, smaller operating units. In some cases, that means enabling groups of as few as five or ten people “who operate like a small bio-tech or an academic team, who can really go after the science.”
Essentially, by separating the R from the D, the company takes the results from research and then puts them through “a more focused, late-stage development organization — which requires a different set of skills from the discovery side.” The split is between research, or ‘discovery’ activities, up to Phase IIa trials; and development work, which applies from Phase IIb onwards. Dingemans says that the results are already visible. There is a significantly higher rate of innovation with up to 30 new drugs expected to enter late-stage development in the next three years. And an industry-leading late-stage pipeline is expected to result in at least five product filings this year.
GSK’s R&D strategy has also allowed much better targeting of resources, which has released considerable cost savings. Between 2009 and 2011, pharmaceutical research costs have fallen from £978m (US$1.5b) to £853m (US$1.3b), while development expenditure has risen from £1.6b (US$2.4b) to £1.7b (US$2.6b). Including overheads, vaccines and consumer healthcare, total R&D spend has been held broadly flat between 2009 and 2011 (before major restructuring costs) despite a very significant expansion of the late-stage pipeline with 15 assets expected to complete their Phase III trials in 2011 and 2012.
This level of productivity and financial efficiency has improved the internal rate of return (IRR) on R&D up from around 11% in 2010 to 12% in 2012, and the company has target rates of 14% over the medium term.
“We have achieved this because we are looking at the returns in a very different way. We are still the only company around with a published IRR target return level for R&D,” says the CFO. “This is a long-cycle business — the IRR is not going to move quickly, but it’s moving steadily in the right direction.”
Keeping it simple
Finance is also playing a part in simplifying GSK’s business more broadly — and reaping the rewards. Driving cost out of the business by reducing and simplifying the manufacturing and R&D footprints and by centralizing support functions has, so far, produced annual savings of £2.2b (US$3.4b).
In addition, a further £600m (US$925m) of savings have been identified, “by really working the existing programs of footprint reduction, process simplification and new infrastructure investment to improve our processes,” Dingemans says. Cost savings have been most notable in manufacturing, R&D and support functions.
So, what is the CFO intending to do with those savings? He says that the company will split them so as to maintain a balance between reinvesting in growth markets and protecting the bottom line.
Growth strategy
Part of what is driving GSK’s return to growth is its strategy to create a more balanced business that is less vulnerable to generic pressures.
Emerging markets are reducing GSK’s dependence on its traditional markets of Europe and the US, and now make up almost 20% of revenue. While not immune from the pricing pressure seen in developed economies, there is greater brand loyalty which restricts the uptake of rival and cheaper generic drugs.
However, GSK is also driving its performance in these markets by improving patient access and improving its cost structure to allow it to deliver its medicines to a wider range of patients across the developing world. For instance, some 80% of the vaccines division’s 1.1b doses in 2011 were distributed in emerging markets, with many delivered at prices well below those prevailing in the West.
GSK has also ensured that it is offering a broad portfolio of drugs for these markets. “We’ve directed the strategy to improve the range of our products that we have in those markets so we’re not just focused on the very innovative top-end products,” Dingemans says. “We’re beginning to take some of our portfolio and open up access points to people who have fewer resources at their disposal.”
“Finance has been instrumental in driving a number of recent initiatives to reduce our cost of goods for a targeted range of products where we can see a real patient need in the emerging markets. This has allowed us to reduce prices, improve access, but also drive significant volumes increases for the emerging markets business. Helping to drive the trade-offs necessary to make these initiatives sustainable is exactly how I see finance in GSK really making a difference.”
HIV treatment is another example. The company has the majority stake in ViiV — an 85%:15% joint venture with Pfizer — which is structured as a standalone operation. “HIV is very much a feature of the emerging markets, unfortunately. Being able to provide appropriate access for patients in these markets is an important priority for us,” Dingemans says.
Interestingly, although GSK owns most of the joint venture, ViiV is independent of both companies. “It has a management team that runs the business on behalf of us as the two shareholders. And where possible, we share infrastructure,” says the CFO. “ViiV buys infrastructure and R&D from both companies. So they leverage the scale of the two bigger groups, but they operate independently.”
He adds that “by creating some focus around the business, we have re-energized the management team. The performance of the business is well ahead of the plans that we originally had for that venture.” It made an operating profit of £824m (US$1.3b) in 2011 on revenue of £1.6b (US$2.5b). A joint venture of this sort of scale sits well with GSK’s acquisitions strategy. Mega-deals are out. “We still see a lot of challenges and risk in large-scale M&A that isn’t justified by the returns,” Dingemans says. “Our M&A focus is very much on smaller-scale businesses that we can fold into our existing network and to which we can add genuine value, by selling the products more broadly, by simplifying their infrastructure or by manufacturing more cheaply.”
Dividends and buybacks
It is still early days for the new financial approach, but GSK has made enough progress — especially in increasing the focus on cash flow generation — to deliver £3.4b (US$5.2b) in dividends in 2011 as well as £2.2b (US$3.4b) in share buybacks. But while the dividends are relatively straightforward, there is sometimes more risk around share buybacks: repurchasing your own stock and then seeing the share price fall can leave the remaining shareholders feeling that the company has made a poor decision to invest in itself.
“We think of our returns to shareholders as a holistic decision,” he explains. The regular dividend is “our first and foremost commitment in terms of delivery of returns and we’re committed to continuing to grow that dividend.”
Alongside that there have been buybacks or occasionally special dividends, such as when GSK returned the proceeds from some recently completed disposals of non-core US over-the-counter brands such as painkiller Ecotrin and digestive aid Beano.
“The way we think about buybacks is: what returns do we expect to generate from buying back stock relative to using that capital for reinvestment in the business or external M&A?” says Dingemans. “We’re using cash flow return on investment (CFROI)-type measures to look across that spectrum and see where we can get the best returns. Last year, we continued to upgrade our buyback during the course of the year because we couldn’t see that there were better uses of the capital.”
Getting a balance
The strategy for the balance sheet is oriented around maintaining the group’s current short-term rating of A-1/P-1 (Standard & Poor’s and Moody’s, respectively). “At that level, you have very broad access to the capital markets, short and long, so our range of funding options is properly protected and diverse,” Dingemans says. But the CFO wants to “use a much broader range of financing sources than we have had in the past to improve the overall returns to equity holders and manage the balance sheet risk in a more flexible way while balancing those objectives with protecting our creditors.”
Gearing is expected to go up — and deliberately so. Cash balances have been running high in recent years, at around £5b–6b (US$7.7b-US$9.3b), partly in anticipation of the costs or settlements associated with litigation over product liability, US anti-trust actions or claims of patent infringement. As some of these challenges move towards resolution, cash holdings will be reduced, net debt will edge up, increasing the leverage but also the returns to shareholders. “We expect to access the markets in a different and more flexible way and reduce our funding costs accordingly,” Dingemans says.
This means matching funding more closely to the business structure. “We used to be very much a dollar-sterling funded company. We’ve now got 38% of our sales outside of the US and Europe, so we’re looking for other funding sources: different maturities, short-versus-long, fixed-versus-floating. We’ve tended to be very long and very fixed. That’s not helped us in taking advantage of some of the markets we’ve seen over the last several years.”
This does not, however, necessarily mean that they will be tapping the markets in an opportunistic way: “We’re always going to run our balance sheet and our funding to specific purposes and specific requirements,” he says. “The finance function is there to support the business. We’re not there to get ahead of the business.”
The CFO:
Simon Dingemans
Age: 49
Appointed CFO at GSK: April 2011
Educated: Oxford University, UK
Previous positions: Simon joined GSK from Goldman Sachs where he was a Managing Director and Partner. Latterly at Goldman Sachs, Simon was a leader of its European M&A business and before that head of UK Investment Banking. Prior to joining Goldman Sachs in 1995, Simon was a Director at S.G. Warburg Group.
GSK:
Formed: 2000 (following merger of Glaxo Wellcome and SmithKline Beecham)
Employees: circa 97,000
Countries: 100+
Market capitailization: £71.6b (US$110b) (as of 8 June 2012)
Timeline
2000 GSK is formed through the merger of Glaxo Wellcome and SmithKline Beecham
2001 GSK launches Advair, an anti-asthma medicine
2007 GSK acquires Domantis and Praecis Pharmaceuticals to strengthen its platform technology capability
GSK strengthens presence in China opening a new R&D center in Shanghai
2008 Andrew Witty succeeds JP Garnier as CEO
2009 GSK and Pfizer launch ViiV Healthcare, which is focused on delivering treatment advances for HIV communities
GSK continues to diversify its business with the acquisition of dermatology company Stiefel
GSK's commitment to emerging markets rises through strategic alliances with Aspen Pharmacare and Dr Reddy's Laboratories
World's largest malaria vaccine trial gets underway in seven African countries
GSK partners with Fiocruz, part of the Brazilian Ministry of Health, to develop and manufacture vaccines for Brazil
2010 GSK continues expansion in China with the acquision of Nanjing MeiRui Pharmaceuticals in China
GSK announces open innovation strategy to help find new and better medicines for people living in the world's poorest countries
GSK drives Larin America growth strategy with the acquisition of Laboratorios Phoenix
2011 GSK acquires UK-based sports nutrition brand Maxinutrition
GSK and Human Genome Science receive approval for Benlysta, the first new approved drug for lupus in over 50 years
GSK enters strategic alliance with McLaren Group
GSK commits to supply 125m doses of its rotavirus vaccine, Rotarixm to GAVI Alliance at a small fraction of developed world prices
2012 GSK joins other global pharmaceutical companies and leading organizations in an effort to help developing nations to defeat neglected tropical diseases
GSK announces significant investment in UK manufacturing, including a new biopharmaceutical plant at Ulverston, Cumbria
Interview by Capital Insights, a Ernst & Young magazine.
www.capitalinsights.info/
The one-time investment banker joined GSK in January 2011 before formally taking up the reins as CFO three months later. He brought to the company a quarter of a century of experience at investment banks such as S.G. Warburg and, most recently, Goldman Sachs where he was a leader of the European M&A business. That background not only gave him exposure to a wide range of companies across many industries and geographies, it also brought him into contact with GSK itself, a client he had worked with for more than 10 years before joining them.
He was, therefore, very familiar with the company’s mix of business — £18.7b (US$29.5b) of its £27.4b (US$42.3b) revenue comes from pharmaceuticals (respiratory, cardiovascular/urogenital, oncology and many other treatments); £3.5b (US$5.4b) from vaccines (against, for example, hepatitis, diphtheria, tetanus, influenza, HPV and rotavirus) and £5.2b (US$8b) from consumer healthcare (including Panadol, Sensodyne, Ribena and Horlicks).
Upon taking up the CFO post, he says that the key questions that needed to be answered were: “How do we get finance to do something quite different inside the company in terms of its engagement with the business? And how do we ensure finance is making a real contribution to both setting and delivering the strategy?”
Driving forward
This was an important mission for Dingemans. GSK may be in a different position to many of its rivals, having weathered much of the impact of the “patent cliff” and moved into a period of growth. However, like the rest of the global pharmaceutical industry, the company continues to face challenges on several levels. The state of government finances in the developed world and the growing costs of healthcare provision have not only impacted upon the prices which public healthcare departments and other payers are prepared to offer, it has also made them increasingly reluctant to give approval to new drugs unless there is sufficient differentiation from others already on the market.
“We need to continue to generate new products and new therapies that really add value as opposed to being the next one in an already well-covered category,” Dingemans explains. “Especially when even after approval is given, there is ongoing pricing and volume pressure from generic drugs which can enter the market at a fraction of the cost once the patent on an innovative drug has expired.”
Dingemans knew that finance could play an important role in battling against the bottom line impact of these pressures. From his perspective as an outsider who knew the company well, he saw a finance function that had been a follower of the strategy but not a leader of it.” He saw a chance for finance to be much more involved, to improve delivery and to help drive performance much more directly.
Addressing this involved getting the finance function to work much more closely in partnership with the commercial counterparts of the business. “This meant improving the quality of decision-making and focusing finance on driving the returns out of the strategy that we’ve laid out over the last two or three years,” says the CFO.
What he calls “a new financial architecture” was created to provide that focus for not only finance but also for the rest of GSK. In particular, it highlighted four key levers through which finance could align the whole organization. These were around “continued support for and investment behind driving top-line growth; adding operating leverage to that growth; improving GSK’s financial efficiency; and converting more of our earnings to cash.”
Shifting focus
Dingemans has been careful to make clear that he wants to build on the governance, controls and financial reporting skills that the finance function had hitherto as its main focus, and not leave them behind. Rather, he wants to “shift the focus and emphasis.” So how has he set about achieving this?
“You’ve got to create the space for people to be able to do that,” he says, “by providing additional resources, and by taking some of the standard and more process-oriented pieces of finance and simplifying them or taking them away and centralizing them.”
Helping to do that is a new central function called Core Business Services (CBS) — a global business unit that offers transactional services for a wide range of functions such as finance, HR, IT, procurement and facilities management. The CBS function is designed to help simplify a big company, to allow those people who discover, make and distribute GSK’s medicines to focus on that. On the finance side, it covers processes such as global financial reporting and analysis. By taking on these more standardized processes, CBS has become a key enabler for finance, helping to shift its focus and “reinvest its efforts in becoming better finance partners with the business.”
Finance at the forefront
Finance has now become “embedded” in decision-making, says the CFO. It has put in place a series of analytics to answer questions such as: which market should be prioritized? What is the pricing environment? What is the product reimbursement profile likely to be? How much investment should be put behind it? What returns are we generating?
“We’ve developed a much more differentiated approach to thinking about how and where new products should be launched.” That initiative started in Europe but is being rolled out across the group, including into emerging markets.
Another area where finance is helping to drive more effective analysis and decision-making is using its global footprint and reach across the different business units of GSK to share best practice. One particular example is how some of the analytics and returns comparisons used regularly by GSK’s consumer business have been successfully applied to the pharmaceutical side of the business. “We’re lifting between the businesses as well as differentiating within them,” Dingemans explains. “Finance has a role in making sure that decisions are being made on the specifics and the facts and keeping that framework current.”
The company is also taking a similar approach in building collaboration between its commercial business where, for example, there can be cross-promotional benefits between pharmaceuticals and consumer products. Early success has come in India, where consumer sales teams are able to explain to dentists the benefits of Augmentin, an antibiotic often used in dental care, alongside their more traditional coverage of Sensodyne, a toothpaste for sensitive teeth.
Returns on research
GSK is patently a business that depends on the success of its research and development (R&D) efforts. But apart from keeping score and backing the findings of its scientists, it’s perhaps not immediately apparent what role finance can play in the investment of capital.
A decade ago, there were some very big mergers in the pharmaceutical industry where, Dingemans says, “one of the key forces was the perceived need to upscale the ability to invest in R&D and put more resources in.” The hope was that greater backing would produce new, big-selling drugs.
However, he feels that this approach has demonstrated that perhaps it is not the “most productive way to access genuine innovation.” GSK is following a different approach, “breaking down some of the industrial infrastructure” to create more flexible, smaller operating units. In some cases, that means enabling groups of as few as five or ten people “who operate like a small bio-tech or an academic team, who can really go after the science.”
Essentially, by separating the R from the D, the company takes the results from research and then puts them through “a more focused, late-stage development organization — which requires a different set of skills from the discovery side.” The split is between research, or ‘discovery’ activities, up to Phase IIa trials; and development work, which applies from Phase IIb onwards. Dingemans says that the results are already visible. There is a significantly higher rate of innovation with up to 30 new drugs expected to enter late-stage development in the next three years. And an industry-leading late-stage pipeline is expected to result in at least five product filings this year.
GSK’s R&D strategy has also allowed much better targeting of resources, which has released considerable cost savings. Between 2009 and 2011, pharmaceutical research costs have fallen from £978m (US$1.5b) to £853m (US$1.3b), while development expenditure has risen from £1.6b (US$2.4b) to £1.7b (US$2.6b). Including overheads, vaccines and consumer healthcare, total R&D spend has been held broadly flat between 2009 and 2011 (before major restructuring costs) despite a very significant expansion of the late-stage pipeline with 15 assets expected to complete their Phase III trials in 2011 and 2012.
This level of productivity and financial efficiency has improved the internal rate of return (IRR) on R&D up from around 11% in 2010 to 12% in 2012, and the company has target rates of 14% over the medium term.
“We have achieved this because we are looking at the returns in a very different way. We are still the only company around with a published IRR target return level for R&D,” says the CFO. “This is a long-cycle business — the IRR is not going to move quickly, but it’s moving steadily in the right direction.”
Keeping it simple
Finance is also playing a part in simplifying GSK’s business more broadly — and reaping the rewards. Driving cost out of the business by reducing and simplifying the manufacturing and R&D footprints and by centralizing support functions has, so far, produced annual savings of £2.2b (US$3.4b).
In addition, a further £600m (US$925m) of savings have been identified, “by really working the existing programs of footprint reduction, process simplification and new infrastructure investment to improve our processes,” Dingemans says. Cost savings have been most notable in manufacturing, R&D and support functions.
So, what is the CFO intending to do with those savings? He says that the company will split them so as to maintain a balance between reinvesting in growth markets and protecting the bottom line.
Growth strategy
Part of what is driving GSK’s return to growth is its strategy to create a more balanced business that is less vulnerable to generic pressures.
Emerging markets are reducing GSK’s dependence on its traditional markets of Europe and the US, and now make up almost 20% of revenue. While not immune from the pricing pressure seen in developed economies, there is greater brand loyalty which restricts the uptake of rival and cheaper generic drugs.
However, GSK is also driving its performance in these markets by improving patient access and improving its cost structure to allow it to deliver its medicines to a wider range of patients across the developing world. For instance, some 80% of the vaccines division’s 1.1b doses in 2011 were distributed in emerging markets, with many delivered at prices well below those prevailing in the West.
GSK has also ensured that it is offering a broad portfolio of drugs for these markets. “We’ve directed the strategy to improve the range of our products that we have in those markets so we’re not just focused on the very innovative top-end products,” Dingemans says. “We’re beginning to take some of our portfolio and open up access points to people who have fewer resources at their disposal.”
“Finance has been instrumental in driving a number of recent initiatives to reduce our cost of goods for a targeted range of products where we can see a real patient need in the emerging markets. This has allowed us to reduce prices, improve access, but also drive significant volumes increases for the emerging markets business. Helping to drive the trade-offs necessary to make these initiatives sustainable is exactly how I see finance in GSK really making a difference.”
HIV treatment is another example. The company has the majority stake in ViiV — an 85%:15% joint venture with Pfizer — which is structured as a standalone operation. “HIV is very much a feature of the emerging markets, unfortunately. Being able to provide appropriate access for patients in these markets is an important priority for us,” Dingemans says.
Interestingly, although GSK owns most of the joint venture, ViiV is independent of both companies. “It has a management team that runs the business on behalf of us as the two shareholders. And where possible, we share infrastructure,” says the CFO. “ViiV buys infrastructure and R&D from both companies. So they leverage the scale of the two bigger groups, but they operate independently.”
He adds that “by creating some focus around the business, we have re-energized the management team. The performance of the business is well ahead of the plans that we originally had for that venture.” It made an operating profit of £824m (US$1.3b) in 2011 on revenue of £1.6b (US$2.5b). A joint venture of this sort of scale sits well with GSK’s acquisitions strategy. Mega-deals are out. “We still see a lot of challenges and risk in large-scale M&A that isn’t justified by the returns,” Dingemans says. “Our M&A focus is very much on smaller-scale businesses that we can fold into our existing network and to which we can add genuine value, by selling the products more broadly, by simplifying their infrastructure or by manufacturing more cheaply.”
Dividends and buybacks
It is still early days for the new financial approach, but GSK has made enough progress — especially in increasing the focus on cash flow generation — to deliver £3.4b (US$5.2b) in dividends in 2011 as well as £2.2b (US$3.4b) in share buybacks. But while the dividends are relatively straightforward, there is sometimes more risk around share buybacks: repurchasing your own stock and then seeing the share price fall can leave the remaining shareholders feeling that the company has made a poor decision to invest in itself.
“We think of our returns to shareholders as a holistic decision,” he explains. The regular dividend is “our first and foremost commitment in terms of delivery of returns and we’re committed to continuing to grow that dividend.”
Alongside that there have been buybacks or occasionally special dividends, such as when GSK returned the proceeds from some recently completed disposals of non-core US over-the-counter brands such as painkiller Ecotrin and digestive aid Beano.
“The way we think about buybacks is: what returns do we expect to generate from buying back stock relative to using that capital for reinvestment in the business or external M&A?” says Dingemans. “We’re using cash flow return on investment (CFROI)-type measures to look across that spectrum and see where we can get the best returns. Last year, we continued to upgrade our buyback during the course of the year because we couldn’t see that there were better uses of the capital.”
Getting a balance
The strategy for the balance sheet is oriented around maintaining the group’s current short-term rating of A-1/P-1 (Standard & Poor’s and Moody’s, respectively). “At that level, you have very broad access to the capital markets, short and long, so our range of funding options is properly protected and diverse,” Dingemans says. But the CFO wants to “use a much broader range of financing sources than we have had in the past to improve the overall returns to equity holders and manage the balance sheet risk in a more flexible way while balancing those objectives with protecting our creditors.”
Gearing is expected to go up — and deliberately so. Cash balances have been running high in recent years, at around £5b–6b (US$7.7b-US$9.3b), partly in anticipation of the costs or settlements associated with litigation over product liability, US anti-trust actions or claims of patent infringement. As some of these challenges move towards resolution, cash holdings will be reduced, net debt will edge up, increasing the leverage but also the returns to shareholders. “We expect to access the markets in a different and more flexible way and reduce our funding costs accordingly,” Dingemans says.
This means matching funding more closely to the business structure. “We used to be very much a dollar-sterling funded company. We’ve now got 38% of our sales outside of the US and Europe, so we’re looking for other funding sources: different maturities, short-versus-long, fixed-versus-floating. We’ve tended to be very long and very fixed. That’s not helped us in taking advantage of some of the markets we’ve seen over the last several years.”
This does not, however, necessarily mean that they will be tapping the markets in an opportunistic way: “We’re always going to run our balance sheet and our funding to specific purposes and specific requirements,” he says. “The finance function is there to support the business. We’re not there to get ahead of the business.”
The CFO:
Simon Dingemans
Age: 49
Appointed CFO at GSK: April 2011
Educated: Oxford University, UK
Previous positions: Simon joined GSK from Goldman Sachs where he was a Managing Director and Partner. Latterly at Goldman Sachs, Simon was a leader of its European M&A business and before that head of UK Investment Banking. Prior to joining Goldman Sachs in 1995, Simon was a Director at S.G. Warburg Group.
GSK:
Formed: 2000 (following merger of Glaxo Wellcome and SmithKline Beecham)
Employees: circa 97,000
Countries: 100+
Market capitailization: £71.6b (US$110b) (as of 8 June 2012)
Timeline
2000 GSK is formed through the merger of Glaxo Wellcome and SmithKline Beecham
2001 GSK launches Advair, an anti-asthma medicine
2007 GSK acquires Domantis and Praecis Pharmaceuticals to strengthen its platform technology capability
GSK strengthens presence in China opening a new R&D center in Shanghai
2008 Andrew Witty succeeds JP Garnier as CEO
2009 GSK and Pfizer launch ViiV Healthcare, which is focused on delivering treatment advances for HIV communities
GSK continues to diversify its business with the acquisition of dermatology company Stiefel
GSK's commitment to emerging markets rises through strategic alliances with Aspen Pharmacare and Dr Reddy's Laboratories
World's largest malaria vaccine trial gets underway in seven African countries
GSK partners with Fiocruz, part of the Brazilian Ministry of Health, to develop and manufacture vaccines for Brazil
2010 GSK continues expansion in China with the acquision of Nanjing MeiRui Pharmaceuticals in China
GSK announces open innovation strategy to help find new and better medicines for people living in the world's poorest countries
GSK drives Larin America growth strategy with the acquisition of Laboratorios Phoenix
2011 GSK acquires UK-based sports nutrition brand Maxinutrition
GSK and Human Genome Science receive approval for Benlysta, the first new approved drug for lupus in over 50 years
GSK enters strategic alliance with McLaren Group
GSK commits to supply 125m doses of its rotavirus vaccine, Rotarixm to GAVI Alliance at a small fraction of developed world prices
2012 GSK joins other global pharmaceutical companies and leading organizations in an effort to help developing nations to defeat neglected tropical diseases
GSK announces significant investment in UK manufacturing, including a new biopharmaceutical plant at Ulverston, Cumbria
Interview by Capital Insights, a Ernst & Young magazine.
www.capitalinsights.info/