* Shares have underperformed 16 pct since Walmsley took over
* Investors worry about dividend as GSK looks at Pfizer unit
* HIV and respiratory medicines face more competition
LONDON, Oct 26 (Reuters) - Nearly seven months into the job, GlaxoSmithKline's new chief executive is facing a battle to convince investors she has the right prescription for growth at Britain's biggest drugmaker.
Emma Walmsley wants to boost the core pharmaceuticals division and also bulk up GSK's big consumer healthcare operation, a twin-track strategy that could strain finances and has fuelled fears for the dividend.
Her declared interest in Pfizer's consumer health unit - expected to carry a price tag of some $15 billion, or maybe more - has crystallised concerns, leading to the stock's worst daily performance in nine years on Wednesday.
The shares have now underperformed the European healthcare sector by 16 percent since she took over on April 1, after previously heading GSK's consumer health unit and working for 17 years at L'Oreal.
For investors, GSK's fat dividend - currently yielding 5.7 percent - is both a lure and an Achilles heel.
The company has said it intends to maintain the current 80 pence-a-share dividend through 2018. But it already pays out a significantly higher share of free cash flow than rivals, so big spending plans could mean lower dividends after next year.
Asked whether she was prepared to sacrifice the dividend to do a large deal with Pfizer, Walmsley told a post-results call it was "too premature and hypothetical to respond to that at the moment".
"One of the concerns we've had about Glaxo is that the balance sheet limits corporate flexibility compared to some of its peers," said Dan Mahony, a healthcare fund manager at Polar Capital, who has opted not to invest in GSK at present.
"The problem is a lot of assets are potentially coming up for sale and sometimes you have to buy things when they are available rather than when the time is right for you as a purchaser."
GSK must listen to the interests of widely differing shareholder groups, including yield-hungry UK investors who have been spooked by dividend cuts at blue chips like Tesco and BP in the past.
Still, the group's diversified strategy of placing bets across prescription drugs, vaccines and consumer health is backed by Simon Gergel, chief investment officer at Allianz Global Investors, who sees it as a hedge against growing pricing pressures in the traditional pharmaceutical industry.
He also appreciates Walmsley's rethink on R&D spending.
Others disagree strongly. High-profile British fund manager Neil Woodford sold his shares in GSK in May in frustration at its refusal to consider a break-up of the company into more focused units.
Walmsley has made bolstering the prescription drugs division her top priority. The goal is to have fewer, bigger new drugs, and she is ready to consider acquisitions to accelerate the process.
However, her decision to focus primarily on HIV and respiratory medicines comes with major challenges as well as opportunities.
GSK admits competition in HIV will intensify next year, as Gilead Sciences launches a key rival medicine, and Walmsley said pricing pressure in respiratory "is real and very much continuing".
There was some good news elsewhere, with progress reported on a promising drug for multiple myeloma and an unexpectedly strong endorsement of the company's new shingles vaccine from U.S. vaccination officials.
But both those developments were largely lost amid Wednesday's 5.5 percent share price sell-off, the biggest one-day fall for the stock since the height of the financial crisis. The stock fell a further 1.5 percent on Thursday. (Reporting by Ben Hirschler; Editing by Mark Potter)