(Bloomberg) — One afternoon in mid-April, Emma Walmsley, the chief executive officer of GlaxoSmithKline Plc, logged into what could be one of the most important video conferences of her career. A few days earlier Elliott Investment Management, the U.S.-based activist fund, had contacted the drugmaker’s chairman, Jonathan Symonds, with some alarming news. Without GSK’s knowledge, Elliott had been quietly buying up billions of dollars of its shares. Now Gordon Singer, a managing partner at the firm and the son of its founder, Paul Singer, was going to explain why, and what Elliott wanted.
No corporate leader relishes a call from Elliott, one of the most aggressive investors on the planet, with a long track record of forcing sales or breakups, ousting CEOs, overhauling boards—and even, on one occasion, seizing an Argentine naval vessel over a debt dispute. Walmsley and Symonds, however, were trying to be open-minded about what Singer had to say; under the circumstances, they didn’t have much choice.
Over the next hour, Singer and a colleague, Sebastien De La Riviere, walked the GSK executives through a detailed presentation on their company. It followed a standard Elliott playbook, outlining what the fund viewed as a series of failings over the years, combined with examples of unflattering commentary from shareholders it had interviewed in the months it spent accruing its stake. Walmsley and Symonds listened politely. But no one on either side of the call was under any illusions: Elliott had just issued a direct challenge to Walmsley’s leadership.
For the 52-year-old CEO, that represented a serious problem. Arguably the highest-profile female executive in Britain, Walmsley was partway through an elaborate effort to transform her vast company, spinning off its consumer business—the maker of Advil, Sensodyne, and Nicorette, among two dozen products—from the core pharmaceutical operation. Defending against an assault by Elliott was not part of the plan. And she’d be doing it in public: hours before the meeting, the Financial Times had revealed that Elliott was targeting GSK.
It was huge news in the U.K. GSK is one of the country’s most prominent corporations—a stalwart of the benchmark FTSE-100 index with more than 94,000 staff and a long list of scientific achievements, including the discovery of some of the earliest effective treatments for leukemia and HIV. It’s also a key player in Prime Minister Boris Johnson’s plans to build Britain into a life-sciences superpower, cushioning the economic blow from Brexit. In some quarters, the idea of GSK being attacked by what the British tabloids called a “vulture fund” triggered a burst of nationalist sentiment. In recent months U.S. investors have attempted to buy several well-known British companies, including the defense contractor Meggitt Plc and grocer Wm Morrison Supermarkets Plc. While an activist campaign is, in theory at least, less transformative than an outright acquisition, Elliott’s move could be seen in a similar light: a crew of American raiders trying to decide the future of one of the U.K.’s corporate crown jewels.
But in truth, the shine had come off GSK long before Elliott began purchasing its shares. Its performance over the last decade has been mixed at best, particularly in comparison to its longtime rival AstraZeneca Plc, which is currently the most valuable British company, in any industry, by a substantial margin. Short of mega-drugs and veering between different strategies, GSK looked like a laggard even before the Covid-19 pandemic—a crisis in which the drugmaker, which was the number-one global producer of vaccines by revenue pre-pandemic, failed to create its own shot. (AstraZeneca, with almost no vaccine experience, teamed with the University of Oxford to create a Covid inoculation that’s now being used extensively).
Walmsley believes she can turn GSK around, doubling down on high-impact research, particularly in vaccines, HIV, and cancer treatment, to restore its position at the forefront of drug discovery. If it all goes according to her plans, GSK’s pharmaceutical and vaccines divisions will grow so quickly that they’ll make up for the loss of the consumer arm—which currently has about 10 billion pounds in annual revenue—by 2031.
Whether GSK can achieve these goals won’t be clear for a while yet. But the more pressing question is whether Walmsley will be given enough time to try. While she and other executives claim her current strategy has broad support from shareholders, what happens over the next weeks and months will be decisive for Walmsley’s future, and that of GSK. She now has to prove the company is heading in the right direction, and that she’s the best person to lead it on the way. If she succeeds, the Elliott campaign may be remembered as a brief diversion in the revival of a storied British firm. If she fails, GSK will become the latest in a long line of adversaries that the fund has bent to its will.
In 2016, Walmsley was sitting at her ground-floor desk in GSK House, the company’s glassy West London headquarters, when then-chairman Philip Hampton called to ask her up to his office. In the elevator, Walmsley hoped that whatever Hampton needed wouldn’t take long; she had another meeting to get to.
A moment after she walked in, Hampton gave her a piece of news that would change her life. After months of interviews, GSK’s board had chosen Walmsley as its next CEO—and the first woman to lead a major drugmaker. “I remember going up in the lift thinking, you know, being distracted or whatever, then coming down in the lift going, ‘right,’” Walmsley said in a July interview at a GSK office in London’s tony Mayfair. “It was an incredible privilege.”
In some respects, Walmsley was an unusual choice. The daughter of a senior Royal Navy officer, she’d studied classics and modern languages at Oxford, and had no background in science or pharmaceuticals. Before joining GSK’s consumer unit in 2010, she’d spent most of her career at L’Oreal, climbing the management ranks before taking charge of the cosmetics giant’s China business. She was also the only female candidate in serious consideration for GSK’s top job, for which the shortlist included three senior executives at rival drugmakers. But according to a person familiar with the selection process, she was every board member’s first pick—a rare degree of consensus, encouraged by a perception that she both understood GSK and retained an outsider’s perspective on the drastic amount of change that it needed. It didn’t hurt her case that the three external candidates were bound to their current roles by so-called golden handcuffs that GSK would have to pay off—with the cheapest at $23 million.
Walmsley would be inheriting a huge, complicated empire, built through decades of dealmaking—some of it successful, some far less so. While GSK traces its earliest roots to an 18th-century London apothecary shop, its modern structure is the result of the merger, in 2000, of two pharmaceutical giants, SmithKline Beecham and Glaxo Wellcome, creating what was then the world’s largest drugmaker. (Subsequent combinations in the fast-consolidating industry soon knocked it from that position).
By the time Walmsley’s immediate predecessor, Andrew Witty, took over in 2008, however, GSK was beset with problems. Key drugs were going off patent, while scientists had raised concerns about whether its best-selling diabetes pill, Avandia, was associated with heart attacks, touching off a legal battle that would ultimately cost the company more than $3 billion. Witty would eventually try to compensate by building up GSK’s consumer arm, whose products—like Aquafresh toothpaste and Panadol painkillers—enjoyed stable revenues and global brand recognition, but could never generate the massive profits of successful prescription drugs.
Walmsley decided her most important task was to get GSK back on the front foot of discovering blockbuster treatments, and then doing everything it could to sell them. In 2017 she hired Hal Barron, an American scientist then at Calico, the anti-ageing startup backed by Alphabet Inc., to lead research and development; to run sales, she poached Luke Miels, a top AstraZeneca executive. In order to focus on the most attractive markets, he and Walmsley slashed the number of countries where GSK operates from 140 to just 70, replacing roughly nine out of every ten country managers. “I saw lots of very smart people who really wanted to win,” Miels, a 46-year-old Australian, said in an interview from a hotel-quarantine room in his home country. “But we just weren’t being successful, or as successful as we could be.”
Meanwhile, Barron would be tasked with finding breakthrough drugs. A veteran of Genentech and Roche with more than 90 peer-reviewed papers to his name, he’d built a reputation as one of the most respected scientist-executives in Silicon Valley. (He continues to be based in San Francisco.) After starting his new role as GSK’s chief scientist, Barron began an effort to revitalize its research operations, particularly by ending what he and Miels saw as a historic reluctance to say ‘no’ to less promising opportunities. In the past, he explained in an interview, when the company had enough money for, say, seven projects, but ten were seeking funding, “we would fund everybody at 70 or 80%.” Instead, “my view is, let’s do seven projects really well, fund them at 100%, and kill three.”
Reducing the number of ongoing bets, however, would bring GSK into tension with the iron law of the pharmaceutical business: the vast majority of development efforts fail. The traditional rule of thumb is that only about one in ten experimental drugs makes it from early-stage testing all the way to patients, and usually at a cost of hundreds of millions of dollars. To improve the odds, Barron believed, GSK would have to get much more precise—by using genomic data and artificial intelligence to target unmet medical needs more accurately, and by ensuring it had a leading role in exploiting new technologies like Crispr, the gene-editing technique that allows scientists to easily alter DNA.
In 2018, Barron met for dinner with Jennifer Doudna, the University of California, Berkeley biochemist who would later share a Nobel Prize for her pioneering work developing Crispr. Barron pitched her on a partnership, one that would combine Doudna’s academic research with GSK’s vast resources to explore new treatments. The collaboration, formalized the following year, is making progress with early projects focused on dementia and neurodegeneration, Doudna said in an interview. “All the signs are pointing in the right direction that we are going to have some amazing results,” she said. “Our goal over the next year-ish is to be able to get to a point where we can point to a couple of new discoveries.” GSK is the only major pharma company developing treatments with Doudna using Crispr; it also began an exclusive research partnership with 23andMe Inc., using the testing provider’s trove of genetic data to seek new drugs. In Walmsley and Barron’s telling, such tie-ups could eventually provide enough of an edge to double GSK’s hit rate, allowing it to bring 20% of drug candidates to market.
Around the time Barron and Doudna began talking about working together, bigger changes were underway back in London. Since becoming CEO, Walmsley had been wrestling with the question of what to do with GSK’s consumer operation. While selling everyday items like toothpaste and painkillers can smooth out the swings in revenue of the volatile pharma business, other large drugmakers have left the over-the-counter trade behind in recent years, on the theory that more focused companies are better able to find and market new discoveries.
To maximize the potential of R&D efforts, Walmsley decided in late 2018 to do the same, moving GSK’s consumer unit into a joint venture with Pfizer Inc., the first stage of a plan to spin it off entirely. “New GSK,” as Walmsley called the entity that would remain, and which she would continue to run, would be tightly focused on lucrative drugs for cancer, HIV, and other diseases, as well as vaccines. “Once you’ve decided that the number-1 priority for capital allocation is the pipeline and R&D in pharma and vaccines, having inside your company the biggest consumer healthcare division” is no longer the most sensible approach, Walmsley explains.
Walmsley’s effort to convince the pharmaceutical world, and her investors, that GSK has what it takes to be an innovation leader is off to a mixed start. Some of its research pipelines are promising. Particularly transformative may be an experimental cancer drug born of the 23andMe partnership. Still so early in development that it doesn’t have a name, it works to block the CD96 protein, which can allow cancer cells to evade detection and destruction by the immune system. If it’s successful, the treatment would be a validation of Walmsley and Barron’s claims that they can revitalize discovery efforts. The company is also testing a number of potentially lucrative vaccines against respiratory syncytial virus and meningitis. On the other hand, a different partner, Germany’s Merck KGaA, ended a trial for a cancer drug called bintrafusp alfa early this year, saying it was unlikely to meet its efficacy goal. In April, GSK halted trials for another cancer therapy. Both were on the list of its top potential moneymakers.
More damaging, reputationally at least, have been the company’s efforts on Covid vaccines. Soon after the pandemic began, GSK announced that it wouldn’t be engaging in the risky, high-profile work of developing its own inoculation. Instead, it argued that it could best contribute by deploying its expertise in producing adjuvants, additives that boost the immune response generated by a given volume of vaccine, helping stretch doses across larger populations. That decision would ultimately leave GSK well behind in the vaccine race. Its principal partnership, with Paris-based Sanofi, was plagued by delays, and may produce an approved shot only by the end of this year. Another joint program with Canada’s Medicago Inc. is expected to yield data from advanced-phase trials around the same time.
While this lag hasn’t affected GSK’s bottom line—like AstraZeneca, it’s pledged to offer Covid vaccines at cost—it deprived the company of considerable prestige and market buzz. Meanwhile, a tangential connection to Operation Warp Speed, the U.S. government project to accelerate vaccine development, turned into a source of embarrassment. In March GSK fired Moncef Slaoui, a longtime executive who served as chief scientist of the American effort, after the emergence of allegations that he’d sexually harassed another employee. (Slaoui apologized “unreservedly” for the incident). Asked about the decision in her July interview, Walmsley was visibly emotional. “These things matter, and they matter to me personally,” she said.
Releasing vaccines in 2022 certainly wouldn’t be too late to make a contribution to ending the pandemic. Between the global spread of the delta variant, the anemic state of immunization efforts in many developing countries, and the potential need for boosters, there’s unlikely to be any shortage of demand. GSK also won U.S. approval in May for sotrovimab, an antibody treatment that can prevent Covid patients from becoming severely ill. But it will still be hard for Walmsley to shake a sense that GSK missed a once-in-a-century opportunity to demonstrate its scientific prowess.
Over successive campaigns, Elliott has developed a distinctive, no-holds-barred style of shareholder activism. Typically, it offers two choices to the companies it invests in: implement its proposals and gain a stalwart ally in the fund, or refuse—and prepare for the consequences. At eBay Inc., for example, CEO Devin Wenig resigned in 2019 amid a shakeup that Elliott initiated. During another campaign, targeting the insurance provider Athenahealth, a series of misconduct allegations against CEO Jonathan Bush appeared in the British and U.S. press. Elliott denied having anything to do with the reports, which led to Bush’s resignation. Elliott then teamed with a private-equity firm to acquire Athenahealth for more than $5 billion.
In late 2020, when Elliott began examining the company, GSK ticked several of its boxes. Since Walmsley became CEO in 2017, the shares had declined by double digits, compared to a roughly two-thirds gain for AstraZeneca, and lagged most competitors in total returns. The world’s third-largest drugmaker by market capitalization as recently as 2006, GSK had fallen to 11th, contributing to an impression it had seen better days.
Elliott began an intensive investigation to learn more, evaluating GSK’s drug portfolio, strategy, valuation, and reputation in the market, according to people with knowledge of the investment. Over several months, Elliott staff interviewed former employees, rival pharmaceutical executives, and shareholders, all before buying a nickel of GSK stock. Remarkably, none of them seems to have felt compelled to warn Walmsley or Symonds that they were being sized up.
Eventually the fund’s management committee, which Paul Singer has led since he founded Elliott in 1977, decided it was ready to proceed. Elliott hasn’t disclosed the exact size of the stake it subsequently built in GSK. All that’s known for sure is that it’s below the 5% threshold that would trigger mandatory disclosure of its ownership under U.K. rules—equivalent to about 3.5 billion pounds ($4.86 billion). But it’s safe to say that it’s in the billions.
Many of the views Elliott heard from other GSK investors were the ones its executives expected: that the company wasn’t producing enough big-hitting new drugs, or making bets bold enough to differentiate itself from other drugmakers. They were more surprised, the people familiar with the investment said, by what they heard about Walmsley. A number of investors, the people said, expressed concern about her lack of a pharmaceutical or science background, and complained that she appeared uncomfortable with detailed discussions of GSK’s drug pipeline or R&D efforts, tending to defer to Miels or Barron. Fairly or not, the Elliott managers developed an impression that one of the factors holding GSK back could be the abilities of its CEO.
It’s difficult for outsiders to parse just how widespread this view is. None of GSK’s top shareholders would discuss their views of Walmsley on the record for this article. The company, for its part, says Walmsley enjoys broad support among the investor base. Obviously, that statement and Elliott’s analysis can’t both be accurate.
Hanging over the debate is Walmsley’s gender, and whether any of the concerns about her leadership are rooted in sexism. Though Elliott — whose 10-member management committee includes nine men — has targeted one of the few drugmakers led by a woman, the firm has also highlighted the fact that, of the more than 100 public-company activist campaigns it’s conducted since 2010, just four have involved female CEOs.
Elliott, which declined to comment for this story, has focused its arguments on the company’s performance. It began to build an offensive that could lead to Walmsley’s removal. In an open letter published in July, it called, among other things, for the company to run leadership searches for both “New GSK” and the soon-to-be-independent consumer division—requiring Walmsley to re-interview for her own job. Elliott doesn’t have an issue with Walmsley emerging as the best candidate but wants the company, led by directors with pharmaceutical and science experience, to go through the process to prove it, according to people with knowledge of the matter. The fund also considers Miels a strong internal pick to replace her, the people have said. (Asked about the possibility, Miels replied that he was focused “on my day job.”)
GSK responded with its own open letter 24 hours later. It had no problem with some of Elliott’s proposals: a CEO search was already underway for the consumer unit, and it agreed with Elliott’s argument that more of its directors ought to have pharmaceutical or scientific backgrounds. But the drugmaker refused to bend on Walmsley. The board had already decided she would remain in charge of GSK after the split, and the company said it wasn’t going to reopen the matter.
Elliott and Walmsley are now in an uneasy stalemate. Unlike some activist investors, the fund is willing to sustain its attacks almost indefinitely; its battle with the Argentine government lasted 14 years. (Elliott prevailed). Elliott executives are having frequent discussions with other shareholders and will monitor their views, as well as GSK’s next moves, before deciding whether to escalate their campaign, the people said.
Unlike in some situations, Elliott has no current plans to solicit a hostile takeover, according to people with knowledge of its strategy. In any case, GSK is enough of an asset to British science that the Johnson government would face enormous pressure to prevent its acquisition, particularly by a foreign player—as then-Prime Minister David Cameron did when Pfizer attempted to buy AstraZeneca in 2014. Instead, the ugliest potential outcome would probably be a proxy fight, with Elliott asking investors to support a slate of new directors for GSK’s board. That’s a risky tactic, and one that activists typically employ only as a last resort. But it would be unwise for GSK, and Walmsley, to think too highly of their chances in such a situation. In the dozens of investments Singer’s fund has made over the past decade, it’s failed to get its way only a handful of times.
Like millions of others, Walmsley has spent most of the last 18 months working from home, in her case from the West London house she shares with her husband and their four children and dogs, not far from GSK’s headquarters. To de-stress from her job—and family squabbles over the number of sneakers piled up by the front door—she tries to get up early for yoga whenever she can. Engineering the turnaround of one of Britain’s largest companies from her home office hasn’t been easy, but Walmsley says she’s trying to remain stoic: “I think it’s tough for people in my sort of situation to complain about all the pressures,” she says.
Her list of tasks is daunting. Over the next 12 months, Walmsley will need to complete the spin-off of GSK’s consumer business, prepare the drug- and vaccine-focused company that remains to go it alone, gain ground in the ultra-competitive cancer field, and potentially launch multiple Covid shots—all while keeping Elliott at bay and hanging onto her position. Despite her new investor’s doubts, she argues that there’s no one better to execute it all. “I’ve been really clear about my personal level of commitment and energy to see GSK very successfully through this absolutely critical moment,” Walmsley says. “You shouldn’t take on these jobs if you’re not prepared to weather with some resilience challenges that come along the way, and I’m blessed with a degree of resilience.”
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