Glaxo SmithKline Retools to Take On Rival AstraZeneca
It might not be so difficult to understand why Emma Walmsley has replaced almost half of GlaxoSmithKline Plc’s key executives in the past year. Glaxo has long held the title of Britain’s biggest pharmaceutical company, but with its shares sliding, it now risks being overtaken in market value by AstraZeneca Plc. AstraZeneca Chief Executive Pascal Soriot, a maverick with a strong appetite for risk, is winning over investors with an emphasis on research and a stable of new cancer drugs. Walmsley, a seven-year veteran of Glaxo who took over the company’s top job last April, faces a potential slowdown in the company’s HIV business, waning sales of its biggest treatment—asthma drug Advair—and concerns that she will cut the dividend.
When Soriot took over in late 2012, Astra’s market value trailed Glaxo’s by almost 35 billion pounds ($47 billion). Today, the difference is about 1 billion pounds. Bloomberg Intelligence has predicted that Astra will lead 13 big drug companies in earnings growth through 2022. Glaxo ranks No. 11 in growth. “There’s more upside to the Astra story,” said Ketan Patel, a fund manager at EdenTree Investment Management who holds shares of both companies. “If you are a long-term investor in this sector, you want to pay for innovation.”
Facing pressure to rejuvenate her company’s pipeline and make its pharmaceuticals division more competitive, Walmsley has replaced about 50 of Glaxo’s 125 top managers, aiming to bring in new ideas and skills. Key hires include Luke Miels, a Soriot protégé poached from Astra who is heading the pharma unit; Karenann Terrell, a former executive at Wal-Mart Stores Inc., appointed to the new role of Digital and Technology Chief; and Genentech veteran Hal Barron, a cancer specialist who will explore new technologies to develop breakthrough drugs. Chief Strategy Officer David Redfern says Glaxo offers the right balance, paying a significant dividend to investors while ensuring sufficient cash flow to fund new prospects. “We do both,” Redfern said recently. “That will enable us to invest more in the business.”
Walmsley signaled that she is not finished scrutinizing her staff. Glaxo is making sure it has the best people in 370 key roles as the company seeks to change its culture and move at a quicker pace, she said at a conference in San Francisco. The CEO’s toughest challenge may be keeping investors calm while she explores acquisitions and invests in research. Just expressing interest in Pfizer Inc.’s consumer health business—with an estimated price tag of $17 billion—on an October earnings call sent the stock tumbling as shareholders fretted about a dividend cut. “It’s harder to see where the growth is going to come from at Glaxo,” said Tim Rees, a portfolio manager at Insight Investment in London who has pared back his Glaxo holding and added to Astra.
Formed through the 2000 merger of GlaxoWellcome and SmithKline Beecham, Glaxo’s strength in consumer health, vaccines, and pharmaceuticals make it a favorite among investors seeking stable, dividend-paying stocks. That stability, though, comes at a cost as the diversity that smooths performance can also blunt growth, said Daniel Mahony, who manages health-care funds for Polar Capital LLP. Neil Woodford, a money manager who had owned Glaxo for more than 15 years, proclaimed a “Glaxit” last year, selling his entire stake after growing frustrated with what he called under-performance. Revenue from the pharmaceuticals division had stagnated, Woodford groused on his blog in May, and growth and margins at the consumer health division were sub-par.
About a decade ago, Astra set out on a riskier, but more rewarding, path. Its acquisition of Medimmune in 2007 brought in a raft of new technology and began attracting talented scientists. While the move roiled investors, it set the stage for Astra to focus on acquiring and creating new compounds. Now it is regarded as a drug development powerhouse. Even after what looked like a crushing failure in a lung cancer drug trial in July, Astra launched five new U.S. products in 2017, and its shares gained 15% last year. “Astra went down one route,” Mahony said. “Glaxo went down the other. You could argue that they were just playing the hand they were dealt.”
Soriot has made Astra a top contender in the burgeoning field of immunotherapies, with new products such as Imfinzi for lung cancer. Glaxo, meanwhile, scaled back in oncology with the sale of its cancer therapies to Novartis AG almost three years ago, though it held on to some promising-but-unproven compounds and says cancer treatments remain a priority. Walmsley last year said she will terminate or sell dozens of drugs in development to focus on a smaller number of programs that have the greatest payoff potential. “Soriot took a very bold approach, saying it’s got to be about innovation and the pipeline, which means we’re going to have to take some risks,” said John Rountree, a partner at pharma consulting firm Novasecta Ltd. in London. “That also puts you on a more volatile path.”
Citations
- https://bloom.bg/2qZRHLq – BusinessWeek
- http://bit.ly/2FxlPRm – Managed Care magazine
After a Solid Holiday Season, Kohl’s Aims to keep its Momentum
Kohl’s gave convincing proof recently that its efforts to get back on track are starting to pay off when it reported stellar holiday season sales numbers. The retailer said that comparable sales had risen 6.9% in November and December, outperforming the overall industry and close competitors like Macy’s, J.C. Penney, and Target.
The results were the fruit of years of heavy investments in Kohl’s technology, particularly fuller integration of stores and e-commerce, improvements to its private brands, better use of store space, and bringing in brands such as Under Armour in 2017, as well as Apple and Fitbit earlier, into its stores. Indeed, stores filled 38% of items ordered online, making more efficient use of inventory, and Kohl’s bet on active wear paid huge dividends with sales there rising 30%.
Kohl’s has made it a top priority to get more people into its stores, going so far as to test out a deep partnership with Amazon.com that includes handling returns for its online rival and showcasing some of its products. The strong holiday season came after years of stagnation from Kohl’s as it leaned on a playbook heavily focused on opening big box stores for years.
But now if faces an even harder test: keeping that momentum going. Kevin Mansell, who is stepping down as CEO in May after a decade at the helm, says the Christmas period was very strong but believes that the company’s moves in the last few years plus the constant innovation it is pursuing will keep Kohl’s turnaround in good stead in the coming years and able to win back market share from competitors. “We’ve done pretty well comparatively so to me that gap is company specific,” Mansell said. “Kohl’s is doing some things better.”
The company, which operates some 1,160 stores, has benefited from seemingly straightforward but crucial steps such as improving the search capability of its web site so it more accurately reflect a customer’s prior purchases. That kind of personalization is also improving Kohl’s marketing in a big way, and Mansell thinks that will be a bigger factor next holiday season. Under incoming CEO, Michelle Gass, who currently serves as Chief Merchandising and Customer Officer, Kohl’s will likely continue to push lining up new merchandise by national brands but also continue to speed up lead times on its own brands, which remain a more challenged part of its business. Indeed, some of Kohl’s improvements have come from removing some of its own products at stores where they were not catching on, rather than imposing a one-size-fits-all approach on its stores, something that is easier now with stronger inventory management firepower.
On the tech side, Mansell thinks the next steps potentially include features like the “Smart Cart” where a retailer offers online shoppers a discount if they go fetch an order in a store. (This is something Walmart’s jet.com pioneered and that is likely to become a norm in retail.) Better tech is something that has enabled Kohl’s to get its app to help shoppers navigate the deals and discounts that are a Kohl’s fixture so that customers know what an item’s price ends up being more easily. Mansell told the ICR conference this week that he thinks this “Your price” feature was behind 30% of online sales growth at the chain during the holidays. Kohl’s may also decentralize some decision-making by giving individual stores better told to manage merchandise and payroll more efficient.
For now, Kohl’s continues to use a small group of stores to pilot and test things to put the company at the vanguard of retail tech, and not ever have to play catch up again as it did for a few years not that long ago. “We’re still focused on innovation,” says Mansell. “Our business is getting a lot better.” It will be up to him for the next four months and then Gass after that, to continue to lead that.
Citations
- http://for.tn/2DnWQ2l – Fortune
- http://reut.rs/2DaMeX4 – Reuters
The Good News Is . . .
Citations
- http://reut.rs/2mnLe7B – Reuters
- http://cnb.cx/2lwnm3s – CNBC
- http://bit.ly/2DqprEp – SuperValue, Inc.
- http://nyti.ms/2CYlNk9 – NY Times Dealbook
- http://bit.ly/2myC9JO – Forbes
- http://bit.ly/2mrdm9P – Consumer Reports
- http://bit.ly/2mxmtqo – Investopedia
- http://bit.ly/2mxA7tu – Kiplinger
- http://bit.ly/2D3AUfY – IRAHelp.com
Planning Tips
Tips for Reducing Your Required Minimum Distribution (RMD)
Holders of individual retirement accounts (IRAs), 401(k)s and other qualified retirement accounts are required to commence taking distributions from those accounts at age 70½. The rationale is that they were allowed to make contributions that were tax-deferred and the balances in these accounts grew tax-free. This is the case even where after-tax contributions were made. Required minimum distributions (RMDs) force the account holder to take a taxable distribution that is based on the account balance at the end of the prior year and their age. The logic is that government wants to collect taxes for all of that tax-deferred growth and the original tax-deferral and that the investor will be in a lower tax bracket in retirement. As to the latter, that may or may not be true. Some retirees do not need the cash flow from these RMDs and would prefer to minimize them and the resulting tax bill. Here a few strategies. Below are some strategies to consider for reducing your RMDs. Be sure to consult with your financial advisor to determine if these are appropriate for your situation.
Roth IRA Conversions – Converting all or part of a traditional IRA account to a Roth IRA will serve to reduce the amount of the traditional IRA account that is subject to RMDs down the road. This strategy can be employed at any point, but it takes planning. If you are interested in doing this, you would be wise to consult with a knowledgeable financial or tax advisor before proceeding as there are income taxes due on the amount converted and the conversion process can be complicated. One strategy might be to look at converting during years where your income is lower than usual. A similar approach might be to look at your income during the early years of retirement if your income is relatively low.
Contribute to a Roth 401(k) – If your company’s 401(k) plan offers the option, consider designating all or some of your salary tax-deferrals to the Roth option in the plan. These contributions are made with after-tax dollars, but the contributions grow tax-deferred. If rolled to a Roth IRA upon leaving, the employer will never require a minimum distribution or incur the associated income tax hit. This is something that will likely be done years prior to even considering the potential impact of RMDs, but you would be wise to consider this if it looks like you will accumulate significant sums in traditional IRA and 401(k) accounts. There are other factors to consider while you are working however and the potential future tax savings may be trumped by other tax and financial planning considerations.
Working at 70½ – For those who are working at age 70½, their 401(k) or similar defined contribution plan with their current employer may be exempt from RMDs. They cannot be a 5% or greater owner of the company, and only this retirement account qualifies. Further, this is not an automatic plan feature. Their employer’s plan must adopt this provision. If this is something you might be considering, it behooves you to ask your employer to adopt this if it is not already included in your plan. You might be eligible to roll balances from prior 401(k) plans into an applicable plan to avoid RMDs.
Qualified Charitable Distributions – Qualified charitable distributions (QCDs) do not serve to reduce the amount of the RMD per se, but this technique does reduce the IRA account holder’s tax liability from the RMD. This allows all or part of the RMD up to $100,000 to be made payable directly to a qualified charity. This deduction applies to IRAs only and not to qualified retirement plans like a 401(k). The amount donated to the charity is not included in the account holder’s income but is also not eligible for a charitable deduction on top of this. Additional rules apply so if you are interested you would be wise to consult with a knowledgeable tax or financial advisor. A major benefit of this strategy is that is can significantly lower the IRA account holder’s adjusted gross income and can have additional benefits in other areas such as the cost of Medicare Part B.
Consider a QLAC – “Consider” is the operative word as qualified longevity annuity contracts (QLAC) are a relatively new wrinkle in the retirement planning arena. Legislation passed in 2014 allows a portion of the balance of a traditional IRA, 401(k), 403(b) or 457 plan to be used to purchase a QLAC and is exempt from RMDs. This annuity would provide a deferred benefit that must commence by age 85 and is limited to $125,000 or 25% of the account balance. While this is a strategy to reduce your RMD, the critical question to answer is whether or not a QLAC is a good choice for part of your retirement assets.
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