Battered Glaxo Faces Calls to Boost Cash Returns

GlaxoSmithKline, its shares off 12% in the past fortnight due to a safety scare over diabetes drug Avandia, is under growing pressure to increase cash returns to mollify shareholders.

Dresdner Kleinwort was the latest brokerage on Tuesday to highlight the potential for Glaxo to increase leverage to the benefit of investors.

Analyst Tero Weckroth said Glaxo had most to gain of any major European drugmaker from adopting some of the techniques of private equity.

By leveraging the balance sheet, he calculated shareholders would receive a 50 to 75% return from dividends alone by 2015 and would still be left with pipeline upside from a R&D-driven pharmaceutical company.

His report follows a similar call from UBS earlier this year for drugmakers to increase gearing.

Craig Maxwell of JP Morgan, meanwhile, believes Glaxo now needs to look at its strategic options on a number of fronts.

Maxwell wrote in a note last week that Glaxo could comfortably lift the dividend payout ratio to 60 from 53% last year, thereby increasing the dividend yield from 3.7 in 2006 to 4.5% in 2008.

It could also go out and buy AstraZeneca , a long-rumored idea, although its British rival's depleted pipeline might make this unattractive.

But the most appealing option for Europe's biggest drugmaker in its current predicament might be to sell off consumer healthcare, Maxwell believes.

Consumer Healthcare Selloff?

In the past, Glaxo has always insisted it is committed to consumer health, which includes non-prescription medicines, as well as oral care and nutritional drinks.

But a sell-off for perhaps 14.3 billion pounds ($28.50 billion) could be significantly accretive, Maxwell argued.

Other analysts suggested a sale of the drinks business alone -- grouping Lucozade, Ribena and Horlicks -- might be more acceptable to Glaxo management, although with annual turnover of 400 million pounds this is only a small part of consumer health.

A Glaxo spokeswoman declined to comment on the latest analyst notes but said the company was focused on its share buyback program as a way to return to cash, adding that dividend payouts were also increased last year.

Chief Executive Jean-Pierre Garnier acknowledged in April that some investors wanted the group to gear up its balance sheet and return more cash, but he said Glaxo was already doing this.

The company increased its debt by around 500 million pounds to 3 billion pounds in the first quarter and plans to double its share buyback to 2 billion pounds this year.

Drugmakers have traditionally run conservative balance sheets with little debt but Dresdner's Weckroth said their recent woes, including an Avandia scare that Glaxo says is unfounded, had prompted more investors to question the strategy.

"For the sector as a whole, the basic message is clear -- if there is no increase in leverage in the near future for Big Pharma, then shareholders will demand to know why," he said.

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