GSK & Abbott… An analysis of the two pharmaceutical giant’s Financial Statements and Market Trends.
About… GSK & Abbott 2
Glaxo-Smith Kline Glaxo Smith Kline Pakistan limited was created on January 1st 2002 through the merger of SmithKline and French of Pakistan Limited, Beecham Pakistan (Private) Limited and Glaxo Wellcome (Pakistan) Limited. This merger, sanctioned by the high court Sindh has made Glaxo Smith Kline the largest pharmaceutical company in Pakistan. It is listed on both the Karachi and Lahore stock exchange. GSK Pakistan operates in two industry segments, pharmaceuticals and consumer healthcare GSK leads the industry in value, prescription and volume market shares and a substantial size difference over its nearest competitor in the industry. GSK has maintained a consistent growth in the sales and profits of the company. 3
Abbott Abbott is a broad-based health care company devoted to discovering new medicine, new technologies and new ways to manage health. The company primarily is engaged in the manufacturing, import and marketing of research based pharmaceutical, nutritional diagnostics, hospital and consumer products. Abbott started operations in Pakistan as a marketing affiliate in 1948; the company has steadily expanded to comprise a work force of over 1500 employees. Currently two manufacturing facilities located at Landhi and Korangi in Karachi continue to use innovative technology to produce top quality pharmaceutical products. On June 29, 2005 Abbott Pakistan Achieved Class 'A' accreditation against the Oliver Wight ABCD Check list. 4
Financial Statements An Explanation… 5
The current assets for both the companies have increased with a slight decrease in the year of 2007. The increase in the current assets for both the companies can be attributed to the fact that the inventories and cash balances have increased. The year 2007 however saw a decrease in the current assets due to a decrease in cash balances and also the payment of A/c receivables. For GSK the decrease in the assets in 2007 has been due to cash and receivables not the inventories
The non-current assets of GSK have been increasing throughout except for FY-05 because of the increase in investments in FY-04 and FY07. There was a decline in FY-05 because of the increase in capital work in progress but a reduction in investments. Abbots non-current assets is due to increase in fixed assets.
The continuous increase in total assets for GSK is due to the 89% increase in cash balances for the period. For Abbot this increase is attributed to the increase in stocks and fixed assets. The decline in 2007 is due to a 69% decrease in cash balances as the company was investing in plant and fixed asset up gradation.
GSK’s current liabilities have increased by 67% for the period due to the company’s reliance on trade payables rather than long term debt and an increase in taxation due to higher profits. Abbots current liabilities declined in 2004 due to a decrease in creditors while the figure increased in all the subsequent years.
The above graph shows that long term debt reliance has been low for both the companies. For GSK it is declining throughout but is greater than Abbot because of staff benefits and deferred liability. Abbots long term debt includes only deferred tax because they have no taxation in current liabilities.
Total liabilities for GSK have increased due to an increase in trade payables and staff benefits. While Abbot’s total liabilities include an increase in creditors and deferred taxation.
GSK’s equity has been rising continuously for the period but the company has relied on short term credit rather than equity financing. Abbot relies more on equity financing and the increase in shareholders equity is due to a large increase in revenue reserves, capital reserves and share capital.
The increase in total liabilities and equity for GSK is mainly due to trade payables, reserves and share capital while for Abbot it is due to the increase in creditors and revenue reserves.
The graph shows that the operating fixed assets increased for both the companies’ in. the operating fixed assets for GSK have however decreased in 2005-06. The increase in the fixed assets that has taken place has been due to the up gradation in machinery of 646 million by GSK and 365 million by Abbott.
The cash balances for both the companies fell in 2007. Though they increase over the period of 2003-6.
The stock in trade has increased for both the companies over the period of five years. This increase has been due to the fact that net sales are not increasing by a higher percentage than the inventory which has led to a higher stock in trade. 11
The profit before tax saw an increasing trend because of the fall in the interest expense of the companies. The profit before tax for GSK remained constant for the period of 2005-07.
The profit after tax for GSK increased from 2003-5 and decreased in the following years. The profit after tax for abbott saw a constant increase over the five year period. The decrease in the profit for GSK has been due to the increase in taxation both current and deferred. For abbot the main increase in taxes has been the current year taxation
13 The earnings per share show a downward trend for GSK and for Abbott the EPS increased till 2005 and then fell and rose again in 2007. The trend for GSK has been due to the decrease in profits in 2006-7. The DPS has been more or less constant for both the companies. For GSK as the DPS fell in 2006-07 as the profits decreased and for Abbott the DPS increased in 2006 and fell in 2007.
The dividends given by the companies have increased over the years as the profits have been on a constant rise. For Abbott the dividends given decreased in 2007 as the company is focusing on expansion of fixed assets.
The EBIT indicates an upward trend over the period. This increase has been due to the constant rise in the sales of the companies. Also the increase has been due to the rise in the other incomes of the companies.
The graph shows:
ABBT share prices and volumes for the period 1-1-03 to 31-12-07. And the dividends announced during this period.
D = Dividend
Courtesy of 15
The graph shows:
GLAX share prices and volumes for the period 1-1-03 to 31-12-07. And the dividends announced during this period.
D = Dividend
Courtesy of GLAX:KSE 16
Ratio Analysis 17
Profitability Ratios The return on assets decreased in 2006 and increased in 2007 for Abbot. The decrease has been due to the higher proportionate increase in the assets than the net income and also because of the higher expenses. The expenses and high inflation rate has attributed to the decrease in the ROA. 18
The gross profit margin decreased for GSK but for Abbott the margin fell in 2006 and then increased in 2007. The reason behind this has been the greater percentage increase in the cost of goods sold than the sales due to the high inflation rate.
The net profit margin for both the companies increased with a fall in 2006. The decrease can be attributed to the increasing taxes and also the high inflation rate in 2006.
From FY-03-06 the company has kept its inventory level high but has balanced it by increasing its cash balances by a great extent and lowering its liabilities by divesting from creditors and accrued expenses. However, in FY ’07 the current ratio at 4.3 was comparatively lower than last 3 years because its current assets declined coupled with an increase in its current liabilities (mainly trade payables). Abbot’s movement is similar to that of the industry’s, with the exception of 2005. The drop can be attributed to the 33% increase in inventory that year, where the current ratio fell from 4.26 to 4.18. The currents assets have been increasing constantly till 2006, however the rate of increase has been very variable.
The NWC of GSK has been increasing due to the high cash balances supporting the stock and a comparatively lower trade payable with the exception of FY-07 when the cash balances decreased by 9%. Abbots’s NWC has also increased till 2006 due to increase in stocks but a comparatively lower amount of creditors and in 2007 NWC declined due to a decrease of 69% in cash balances. 21
Efficiency Ratios For GSK capital expenditure of Rs. 646 million was made in FY’07 of which significant portion went to facility improvement and rationalization. The decline for Abbot is due to the fact that the company has been investing in its fixed assets, mainly in plant, machinery and infrastructure up gradation. Capital expenditure of Rs. 365 million was made to improve compliance with the latest medical requirements. 22
In 2004 for GSK the inventory level has gone down relative to its cash and cash balances however, the company has increasing inventory turnover from 2005 onwards. This is mainly due to capital expenditure made on facility improvement. For Abbot the decline in 2004 is due to higher sales but after 2005 the ratio has increased due to the company’s plant expansion and up- gradation project that has been commissioned in phases till 2007. 23
GSK’s ratio has declined because of an increase in sales but it increased slightly in 2007 because of higher CA as compared to CL. For Abbot the ratio has declined due to an increase in non-productive assets but it increased in FY-07 as sales increased. 24
Market to Book Value Ratios 25
The Dividend yield remained stable till 2005 then increased to 5% in 2006 and fell again in 2007. For Abbot this ratio has varied over the period. 26
During 2004 the TIE ratio fell due to a high amount of taxation along with trade payables. FY 05 shows the highest TIE ratio from FY03 which is due to a significant rise in the EBIT because of greater net sales as compared to prior year along with a reduction in the interest charges due to trade payables and taxation.
In 2006 TIE again increased because of rising interest rates due to SBP’s tight monetary stance. But it recovered greatly in FY '07, due better EBIT and lower finance costs. Looking at Abbot’s T.I.E ratio it fell in 2004 and then rose sharply in 2004 which was due to the fact that interest charges fell by 81%.
This increase continued till 2005 due to a higher EBIT and lower finance costs compared to previous years. However TIE again declined slightly in 2006 due to a 21% increase in interest expense compared to a very small 5% increase in EBIT. But it recovered immensely in FY’07.
The ratio for GSK has declined till FY-06 showing the reliance on short term credit how it increased to 0.25 in 2006 because of the high cost of doing business. The company is becoming more financially stable and in a better position to borrow now and in the future, if the need arises.
Abbot’s ratio has declined to a shift from debt to equity financing. This ratio has increased in FY’07 on the account of lower equity base compared to a higher deferred taxation.
Beta Analysis 29 The Beta calculated for GSK and Abbot is 0.001 and 0.002 respectively These stocks are less volatile than the benchmark KSE-100 index Generally pharmaceutical stocks are considered stable stocks due to their relatively stable earnings and payouts to the shareholders GSK and Abbot have very similar beta indicating that both these stocks are considered risk averse, and their prices remain relatively stable vis-à-vis the market
Abbott is slightly more volatile than GSK and thus has an expected return of 9.51% compared to the expected return of 9.41% on GSK. 30 CAP Model
Future outlook - GSK The FY 2008 is likely to be challenging The business improvement initiatives undertaken in past few years by GSK, have contributed towards its enhanced operational efficiencies and cost savings However, this beneficial impact is eroding and will continue to do so unless the Government implements the existing notified policy of allowing price adjustments to offset inflation and devaluation. This is essential if the industry is to sustain itself for future. GSK will also continue to focus on introducing innovative medicines developed through its global R&D effort 31
Future outlook - ABBOTT Almost 85% of Abbot’s business depends on the sale of pharmaceutical products, price of which have been static and there has been no offset made by the Government to account for the adverse impact of rising inflation (particularly in energy and fuel costs), raw and packaging material costs, construction costs and Rupee devaluation, particularly against major European currencies. Furthermore an increase in price of registered products is also demanded so as to offset inflation and devaluation Abbot furthermore, urges the government to take stringent action against the menace of counterfeit and spurious drugs that have infiltrated the local market 32
GSK Acquires Stiefel Laboratories Intl. GlaxoSmithKline plc (GSK) and Stiefel Laboratories Inc. today announced that they have signed an agreement to create a new world-leading specialist dermatology business. Under the terms of the agreement GSK will acquire the total share capital of Stiefel for a cash consideration of $2.9 billion. GSK also expects to assume $0.4 billion of net debt upon closing. A potential further $0.3 billion cash payment is contingent on future performance. GSK’s existing prescription dermatological products will be combined with Stiefel’s and the new specialist global business will operate under the Stiefel identity within the GSK Group. The formation of the new business will provide significant opportunities for both sales and cost synergies. Stiefel’s products will benefit from GSK’s global distribution and commercial organisations, particularly in markets such as Brazil, Russia, India, China and Japan. GSK’s products will benefit from Stiefel’s specialty sales force, relationships and experienced management in dermatology. The transaction has been approved by the Stiefel stockholders. Closing of the transaction is conditional upon certain matters including receiving certain regulatory clearances and no material adverse change occurring in respect of Stiefel's business prior to closing. The transaction is expected to close in the third quarter of 2009. Stiefel Laboratories News 2009-04-20 34
GSK Pakistan Posts Higher Yr Net Profit of US $24.3 Million KARACHI, Apr 03, 2009 (AsiaPulse via COMTEX) -- GlaxoSmithKline Pakistan Limited has posted after tax profit of Rs 1.955 billion (US$24.3 million) for the year ended 31 December 2008, up 17.1 per cent from Rs 1.670 billion in the previous year. The profit before tax of the company increased 12.9 per cent to Rs 3.001 billion in 2008 against Rs 2.658 billion in the same period in 2007. The company's net sales jumped 26.3 per cent to Rs 13.403 billion in 2008 from Rs 10.610 billion previously. The company's earning per share increased to Rs 11.46 in the period under review against Rs 9.79 in the same period a year earlier. The 62nd Annual General Meeting (AGM) of GlaxoSmithKline Pakistan, held here on Tuesday, approved the annual financial results for the year ended December 31, 2008. The board of directors of the company in its meeting held here on February 23 had recommended a final cash dividend for the year at Rs 7.00 per share. (PPI) 35
GSK to buy BMS Pakistan for $36.5 million LONDON: GlaxoSmithKline, the world's second biggest drug maker, said on Monday it was buying Bristol-Myers Squibb Pakistan for $36.5 million, adding to recent acquisitions made in emerging markets. In October Glaxo bought Bristol-Myers Squibb Co's Egyptian mature products for $210 million. The deal includes Veslosef, a popular branded antibiotic in Pakistan, along with products in cancer and cardiovascular drugs. Although small in size this further highlights the strategy outlined recently by CEO Andrew Witty to increase GSK's presence in the emerging markets, an area where it currently lags its European peers," said Simon Mather, an analyst at WestLB. "We are continuing to make investments in emerging markets, to grow and diversify GSK's business," said AbbasHussain, GSK's president, emerging markets, in a statement on Monday. 22 Dec 2008, 1841 hrs IST, AGENCIES 36
GSK Biological Pumps More Money Into Pakistan Glaxo Smith Kline (GSK) Biological, Belgium would be investing a big amount (700 million Pak Rupees) for expanding the existing four plants manufacturing base in Pakistan, Pakistani media revealed last week. The reports quoted Stefan Vranckx of GSK Belgium who was leading a 12-member delegation that paid a Pak visit recently. Vranckx reportedly made the pledge during a meeting with ZahidHamid, Pakistan's minister for privatisation and investment, in Islamabad on March 16. Stefan reportedly said that their group intended to invest in the field of vaccine production in Pakistan on Private Partnership basis stating that Pakistan has quite big market for the product. “Our group was also studying the potential of investing in dairy, Issue: 722 Posted: March,23 2007 37
References Business Recorder www.brecorder.com Business Week www.businessweek.com/investing KSE www.kse.com.pk Various other newspapers who have been referred to in the main text. 38