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Long-term Corporate Finance Project on GlaxoSmithKline Inc.


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Long-term Corporate Finance Project on GlaxoSmithKline Inc.

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  2. 2. Fin 6601 Fall, 2008 Nroop Bhavsar Prerak Shah 2
  3. 3. Table of Contents Executive Summary…………………………………………………………………..4 Financial Analysis…………………………………………………………………….6 Company Information and Market Analysis…………………………………………10 o Stock analysis o Risk analysis o Debt(Bond) analysis In-depth analysis of share buy-back program for the capital structure decisions….14 GSK & E-commerce………………………………………………………………….18 Multinational operations……………………………………………………………..21 GSK in the news……………………………………………………………………...26 Conclusion……………………………………………………………………………29 Appendices……………………………………………………………………………31 3
  4. 4. Executive Summary GlaxoSmithKline plc (NYSE: GSK) is a global healthcare group engaged in the creation, discovery, development, manufacture and marketing of pharmaceutical and consumer health related products. The company operated in two segments: Pharmaceuticals (Prescription pharmaceuticals and vaccines), and Consumer Healthcare. Key ratios analysis over the last three years proves company’s strong liquidity, even though beginning of credit crisis in August, 2007. Overall profitability of company is well above average of the industry or the competitors. Asset management and debt ratios build a strong capital structure of a company. In market analysis section, GSK’s stock price is compared with market proxy-Dow Jones Industrial Average and its competitor- Pfizer, Inc. Further, company’s securities’ holding risk is explained by the application of beta. We explained how beta of the company is related to rate of return company gets on its securities. Company’s cost of debt, which is YTM of its publicly traded bond, is determined and compared with US treasury bond yield curve. Key Stock Statistics $54.64 - 52- week Range 31.02 Market Capitalization (B) $93.27 Common Shares O/S (M) 5,550.00 Dividend Rate/Share $2.14 $10 Invested 5 Yrs Ago $9,061 4
  5. 5. In our in-depth analysis topic, we have chosen GSK’s share buy-back program to be a best borrowers in 2008. We briefly explained how this program helped company to raise capital by borrowing money and built its capital structure. We have taken importance of share buy-back in consideration for capital structure decisions. In next section, we explained how GSK uses E-commerce, E-business and internet to increase profitability and combat with fierce competition. GSK has collaborated with many tech companies to expand its E-commerce operations. GlaxoSmithKline has operations in some 114 countries, with products sold in over 140 countries. We explained company’s global operations in term of its international growth strategy. Further, we explained how company manages geographical and exchange rate risks. In the last section of the report, we noticed GSK in the world news from a number of acquisitions to selling of some assets, from tax disputes to investments in research; from joining Sipp to launching new RFID pilots. 5
  6. 6. Financial Analysis- Key ratios & analysis The number of key ratios like liquidity, profitability, debt and asset management are analyzed below with their 3-years average and industry average as a norm for comparison and analysis: Liquidity 2005 2006 2007 3-year average Industry average Quick Ratio 1.13 1.15 1 1.09 1.087 Current Ratio 1.39 1.51 1.32 1.41 1.98 Financial strength looks at business risk. The stronger a company is from a financial standpoint, the less risky it is. The quick ratio compares cash and short term investments to the financial liabilities they expect to incur within a year’s time, while current ratio compares year-ahead liabilities to cash on hand now plus the other inflows, the company is likely to realize over that same 12-month period. Here, quick ratio is almost as same as the industry average is, but current ratio falls below the industry average. This shows that company is doubtful to maintain current operations as usual with current cash reserves in bad periods. Thus, the firm might have or have not enough resources to pay its debt over the next 12- month period. Profitability 2005 2006 2007 3-year average Industry average Gross Margin % 78.01% 78.43% 76.59% 77.68% 53.93% Net Profit Margin% 22.23% 23.67% 23.38% 23.09% 14.12% ROA% 19.21% 20.85% 18.78% 19.61% 11.73% ROE% 71.94% 64.55% 54.92% 63.80% 25.55% ROI% 30.04% 30.57% 27.27% 29.29% 22.57% These ratios summarize overall profitability, or the bottom line. Firm’s ROA, ROE and ROI % are much higher than industry averages. These enormous figures of return show that company gets massive returns on its investments. Higher return on equity indicates possible 6
  7. 7. greater debt proportion in firm’s capital structure. A company’s ability to operate profitability can be measured directly by measuring its return on assets. Company’s assets are found to be profitable in generating revenues. It shows firm’s higher efficiency at generating profits from every dollar of net assets. Debt 2005 2006 2007 3-year average Industry average Total debt to equity 0.89 0.58 1.1 0.86 0.43 LT debt to equity 0.72 0.51 0.74 0.66 0.36 Interest coverage 17.4 29.07 20.83 22.43 Not available The LT debt to equity ratio looks at the company’s capital base. The total debt to equity ratio includes long term debt and short term debt. Firm’s higher debt to equity ratio compared to industry average indicates greater debt proportion in company’s capital structure that supports higher ROE% in above paragraph. In addition, it shows that company has been aggressive in financing its growth with debt. Company’s higher interest coverage ratios over the last 3 years indicate its ability to pay interest on outstanding debt. Thus, we can say that company is generating sufficient revenues to satisfy interest expenses. Asset management 2005 2006 2007 3-year average Industry average Column1 Total asset turnover 1.49 1.73 1.61 1.61 0.69 Inventory turnover 17.06 19.72 16.55 17.78 9.6 Firm’s higher asset turnover ratio indicates its efficiency to use its assets in generating revenues which supports higher number of ROA%. These higher figures of asset turnover ratio give possibility of company’s lower profit margins that tends to have higher asset 7
  8. 8. turnover. Higher inventory turnover stands for strong sales of company along with the possibility of ineffective buying. 8
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  10. 10. Company Information & Market Analysis GlaxoSmithKline PLC (NYSE:GSK), formed through the merger of British drug makers Glaxo Wellcome and SmithKline Beecham in December 2000, ranks as the world’s second largest pharmaceutical company. GSK group engaged in the creation, discovery, development, manufacture and marketing of pharmaceutical and consumer health-related products. GlaxoSmithKline supply one quarter of the world's vaccines and by the end of February 2008 GSK had 24 vaccines in clinical development. It has operations in some 114 countries, with products sold in over 140 countries. The company operates in two segments: Pharmaceuticals (prescription pharmaceutical and vaccines) and Consumer Healthcare (over-the-counter medicines, oral care and nutritional healthcare). The company offers a wide range of respiratory drugs, the most important of which is Seretide/Advair (2007 sales of $7.0 billion), a leading asthma treatment. GSK is believed to be the leader in HIV/AIDS therapeutics, with its Trizivir, Epivir and Combivir drugs. The markets for its products are the United States, France, Japan, United Kingdom, Italy, Germany and Spain. The U.S. accounted for 48% of pharmaceutical sales in 2007, Europe 30% and other regions 22%. The dollar value of the global pharmaceutical market was projected to exceed $770 billion in year 2008, according to IMS Health. Stock price performance & Risk analysis 10
  11. 11. . GlaxoSmithKline is a pharma giant which is listed on the Dow Jones Industrial Index, so to know the stock price performance of the company we had compares GSK with the index itself. The goal of the performance analysis is to determine the attractiveness of a market and to understand its evolving opportunities and threats. To get a better idea of company’s position we also had compare with one of the competitor Pfizer Inc (PEF) in the chart. 11
  12. 12. In the chart we have consider a five year period starting form 2004 to the date. GlaxoSmithKline Plc (GSK) share was trading at $44.63 in the beginning of the year 2004. Due to strongest R&D position in the global pharmaceutical industry by the subsidiaries of GSK they were able to grow constantly with the market as compare to the competitor Pfizer (PFE). The stock kept its upward trend and reach at its lifetime highest price of $59.35 in the year 2007 against the industry which was in downward trend. The downward trend can be seen form the PFE’s performance. Since the financial crisis the market has been in a free fall, which affect the stock performance of GSK and it also had been hurt from this effect, the stock now has been trading around $35. So in spite of having advantage of good pipeline and a better growth company stock has been on a decline. So from the market trend we can say that GSK is very constantly moving with the market and doing much better than the pharmaceutical industry. But as market analysis give us a general idea about the trend as an industry, for an in-depth analysis of the company we have to take into consideration another measure called Beta. Beta is a measure of the risk for the project or projects undertaken by the company. In other words Beta of the stock can be defined as weighted average beta of all the projects under taken by the company. Beta contains mainly two type of risk: financial risk and business risk. Beta can be calculated by using statistical measure of regression. By using regression analysis, we have found different measure like R square, intercept and the coefficient. Form the calculation we got GlaxoSmithKline Plc has beta of 0.66. On the other hand published data about GSK stock shows beta of 0.58. So there are two different betas available now which are because of different reasons like: • Published beta includes both risks, while calculated beta includes only business risk. As business risk is unsystematic risk, it can be avoided by choosing firms with lower unlevered beta. • Different time period may be considered when calculating beta. • Frequency of the transaction may be different 12
  13. 13. • Different market proxy may be considered or • Different market database may be used to calculate the beta. The main objective of the manager is to maximize the value of the shareholders; they achieved that by doing capital budgeting decision and capital structure decision. For that they try to keep their firms risk at lower level to give investor more return on their investment. From the beta we can know how much riskier the investment and what should be the expected return form that investment in the company. The published beta for GSK is 0.66 which means that if the market moves 1 point upward or downward, the stock of the firm will move 0.66 in the same direction of the index. Debt (Bond) analysis Yield to maturity, YTM, is considered as cost of debt of a firm. It is a measure of the return of a bond. It allows investors to calculate the fair value of different financial instruments. It is almost always given in terms of annual effective rate. The bond is priced relative to a benchmark, usually a government security. The yield to maturity on the bond is determined based on the bond's rating relative to a government security with similar maturity or duration. The better the quality of the bond, the smaller the spread between its required return and the YTM of the benchmark. This required return is then used to discount the bond cash flows. The duration of a bond measures the sensitivity of the bond's price to interest rate movements, expressed as a number of years. The reason for expressing this sensitivity in years is that the time that will elapse until a cash flow is received allows more interest to accumulate. Therefore the price of an asset with long term cash flows has more interest rate sensitivity than an asset with cash flows in the near future. US treasury bond yield curve YTM% 13
  14. 14. Source: Bloomberg Here, corporate bond has always higher risk as compared to Government treasury bonds that are considered as risk-free securities. Thus, GSK has to pay higher premium to the investors to lend money to the company. This is the reason why corporate bonds have higher yields. 14
  15. 15. Best Borrowers 2008: GlaxoSmithKline (Capital Structure Decision- Bond Issues for Share Buyback Program) Stock Buyback Program: When a corporation buys its own stock on the open stock market, it is considered a quot;stock buybackquot; and the shares purchased are re-titled quot;treasury stock”. A share repurchases or stock buyback distributes cash to existing shareholders in exchange for a fraction of the firm's outstanding equity. That is, cash is exchanged for a reduction in the number of shares outstanding. The firm either retires the shares or keeps them as treasury stock, available for re- issuance. Benefits of Stock Buybacks Increased Shareholder Value & Stock Price - When a company reduces the amount of shares outstanding by declaring a stock buy back program, each of your shares becomes more valuable and represents a greater percentage of equity in the company. There are many other ways to value a profitable company but the most common measurement is Earnings per Share (EPS). If earnings are flat but the number of outstanding shares decreases automatically earnings increases. An increase in EPS will often alert investors that a stock is undervalued or has the potential for increasing in value. Increased Float - When a company repurchases its own shares, it reduces the number of shares held by the public so, even if profits were to remain the same, this would have the effect of increasing earnings per share. So, repurchasing shares, particularly when a company's share price is undervalued or depressed, can provide a competitive return on investment. As the number of outstanding shares decreases, the remaining shares of GSK represent a larger percentage of the float. If supplies are less against demand, there will be potential upward movement in the price of a stock. Income Taxes benefits for the company - Share repurchases also allow companies to covertly distribute their earnings to investors without inflicting them with double taxation When excess 15
  16. 16. cash is used to buyback company stock, in lieu of increasing or paying dividends, shareholders often have the opportunity to defer capital gains and lower their tax bill if the stock price increases. Also, if the stock is held for more than one year the gain will be subject to lower capital gain rates. They also minimize transaction costs. Price Support - Frequently companies announce a buyback after its stock has taken a hit, which is merely an overt action to take advantage of the discount on the shares. This lends support to the price of the stock and ultimately provides security for long-term investors during rough times. Potential Pitfalls Not all buybacks are equal and some buybacks seem to be nothing more than an attempt to manipulate the stock price. Buyback Percentage- there is a direct relation between the percentage of buyback and chances of success means higher the percentage of buyback greater the potential for profits. Unfortunately, the buyback percentage is not typically part of an announcement so in order to determine if there is any significance to the announcement you'll need to do some research. Don't assume that a large number of shares is necessarily a large percentage. Stock buyback programs take advantage of supply and demand by reducing the number of shares outstanding, increasing EPS shareholder value, float and ultimately the price of stock. GlaxoSmithKline capital structure decision Capital Structure of a company is a mix of a company's long-term debt, specific short-term debt, common equity and preferred equity. The capital structure is how a firm finances its overall operations and growth by using different sources of funds. Companies need capital in order to run their business, do necessary investments and grow larger and faster. These actions are combined with high costs where both internal and external financing. GSK is raising fund thru bond issue for its share repurchase program, which is a long term capital structure 16
  17. 17. decision for the firm. Generally by capital structure everybody refers to the debt to equity ratio i.e. D/E ratio. The table of GSK’ debt and equity is as follow. long-term debt in Common equity Debt to equity Year millions of £ in millions of £ ratio (D/E) 2003 3651 7720 0.47 2004 4381 5925 0.74 2005 5271 7311 0.73 2006 4772 9386 0.51 2007 11380 9910 1.15 In case of GSK, over the last 5 years period, debt position had increased continuously with two main points to attend: Long term debt declined slightly in 2006 and went skyrocketed in 2007. And now in the year 2008 Glaxo has raised a massive $9 billion by issuing bond which is a long term debt. They distributed it in four parts of $2.75 billion due in 2038, $2.75 B due in 2018, $2.5 B in 2013 and $1 B due in 2010. Debt increases the burden of the company in terms of interest payment. Here, Company using more of debt capital because it is confident about returns from the existing projects. Company has confidence that returns will be higher than cost of debt. GSK will be using this fund for the purpose of a buyback their existing shares which sends signals about the company's prospects to the market--hopefully, that 17
  18. 18. prospects are so good that the best investment can be made in the company now and they believe that the shares of the company are trading at lower price than its actual value. GSK & E-commerce 18
  19. 19. In the last two decades application of E-commerce is evolving from technology driven to more user driven. E-commerce aids to exchange information and execute transactions among enterprises and individuals. It facilitates electronic adaption of communication for business process via EDI (Electronic Data Interchange). E-commerce provides the pharmaceutical industry with better mode of transaction to achieve competitive advantage and sustained growth. This enhances the value of the industry through key underlying processes such as, high value drug innovation, clinical development and trial, project and people management, marketing and sales. E-commerce has 3 major impacts on the pharmaceutical industry: I. Enhances the values of the latest clinical developments II. Increases shareholders’ value III. Successfully reduces the time-cycle of research and application On the finance standpoint, E-commerce helps firm to, • Reduce costs • Improve supply chain management processes • Influence capital structure and budget processes of a firm With the help of internet or E-commerce, there may be direct relationship between the consumer and the drug manufacturer. Creating this new way of drug manufacturing and distributing instead of the traditional way, will give many tasks for supply chain management. GSK and E-commerce GSK is delivering award-winning E-commerce solutions focused on wholesalers, retail chains and the hospital segment. GSK has been using E-commerce since last decade to improve research functions within the firm and thereby reducing the costs. It has been in agreements with or collaborated with the consulting firms and IT firms to develop E-commerce functions, ultimately to improve efficiency of firm’s operations by keeping the operating costs constant and increasing shareholder’s value. 19
  20. 20. Some of the examples are given below: Microsoft® Visual Studio®.NET and Microsoft.NET Framework GSK has found Microsoft technology as the right prescription for creating XML web services. GSK used Microsoft Visual Studio.NET and the Microsoft.NET Framework to create a new web-based product catalog. This gave few benefits to the company: • Catalog Administration Tool allowed content business owners to enter their own product updates, thus seeing the results in real time without having the developers write the queries manually. • XML web service makes the catalog available to any platform • Allowed GSK to improve content delivery E-procurement platform GSK will lease e-business software for global sourcing from Emptoris. It will implement Emptoris’s ePASS system, a portfolio of collaborative sourcing applications, across operations in the US, UK and elsewhere. The system will allow GSK to perform, • Supplier qualification management • Reverse auctions • Other internet based negotiations with suppliers, Inc., a leading B2B e-marketplace for the global scientific products industry came in to the agreement with Glaxo Wellcome Inc.. According to agreement, Glaxo Wellcome utilized’s e-marketplace for the purchase of third-party laboratory suppliers via a private marketplace. 20
  21. 21. The e-marketplace provided Glaxo Wellcome’s research staff with access to information on almost one million scientific products. Users will be able to, • Search multiple suppliers’ products simultaneously • Compare product attributes • Order from multiple companies on one consolidated order form • Track order status CambridgeSoft Electronic Notebook Software CambridgeSoft Corporation, the leading provider of E-notebook solutions has entered into an agreement with GSK to provide software licensing to GSK’s R&D facilities. GSK selected CambridgeSoft’s E-Notebook for the flexibility it demonstrated across the wide range of data separated in the many disciplines and functional areas within GSK’s Discovery Organization. GSK is partnering with CambridgeSoft to customize the E-Notebook to meet GSK requirements and integrate with key applications and workflow tools. 21
  22. 22. Multinational operations GSK is a global healthcare group engaged in the creation, discovery, development, manufacture and marketing of pharmaceutical and consumer health-related products. It has and operations in some 114 countries, with products sold in over 140 countries. The company operates in two segments: pharmaceutical and consumer healthcare. • Estimated 7% of the world’s pharmaceutical market • Every minute more than 1100 prescriptions are written for GSK products around the world • 10 manufacturing facilities around the world for investigatory and launching drugs and then after two years of early production, company has 80 manufacturing plants around the world for new pipeline products United Kingdom The UK department of Health has selected GSK’s cervical cancer vaccine for its national immunization program. The program aims to protect against the two types of human papillomavirus(HPV) that are responsible for approximately 70% of cervical cancers, will start in September 2008 and will vaccinate girls aged 12 to 13 each year. This represents one of the largest HPV national immunization programs in the world to date and GSK looks forward to working with more governments around the world to ensure that as many girls and women as possible can benefit from cervical cancer vaccination with Cervarix. Africa GSK is extending its portfolio in Africa in a joint venture with South African based pharmaceutical company Aspen to boost its emerging market sales. 22
  23. 23. Demand for pharmaceuticals in emerging markets is forecast to grow by 13%- triple that of traditional Western markets- and will account for 40% of growth in the worldwide pharma market by 2020. 23
  24. 24. Other emerging market operations Santarus, Inc., a speciality pharmaceutical company, has entered into agreements granting exclusive rights to GSK, to commercialize prescription and OTC immediate- release omeprazole products for a number of markets in GSK’s international region including Africa, Asia, Middle-East, Central and South America and to distribute and sell ZEGERID® brand prescription products in Puerto Rico and the U.S. Virgin Islands beginning in the first quarter of 2008. Under the license agreement, GSK will be responsible for the development, manufacturing and commercialization of omeprazole products in up to 114 countries, excluding U.S., Europe, Australia, Japan and Canada. Led by new CEO Andrew Witty, a new management team will form an “emerging markets” unit focused on building business in China, Russia, Brazil, India and the Middle East. Singapore GSK is working with the Economic Development Board (EDB) on a 10-year ‘Strategic Roadmap’ to identify new growth opportunities in Singapore. EDB and GSK look forward to map out the tremendous growth opportunities in healthcare and Asia, and to explore how Singapore and GSK can jointly develop innovative solutions to meet the needs of patients and the marketplace. Hong Kong GSK Hong Kong pharmaceuticals is one of the leading companies in the Hong Kong pharmaceutical industry. It also has leadership in four major therapeutic areas- antibiotics, anti-virals, respiratory and vaccines. GSK Hong Kong consumer healthcare markets a portfolio of healthcare products, OTC medicines, nutritional drinks and oral care products. 24
  25. 25. Poland GSK ramped up drug production at its polish site as it prepared to more than double the number of markets the plant would supply in March 2007. Poznan operation currently undertakes finished dosage manufacturing and packaging of a number of its mature tablet form products for 30 global markets. Latin America Labopharm and GSK have come to an agreement wherein GSK will market and distribute Labopharm’s once-daily tramadol pain medication in 20 Latin American and Caribbean countries. Under the terms of the license terms, Labopharm will supply GSK with bulk tablets and GSK will register, package and distribute the product throughout the licensed territory. Foreign Exchange Risk Management GSK has entered into forward foreign exchange contracts in order to swap liquid assets and borrowings into the currencies required for company purposes. At 31st December 2000, the firm had outstanding contracts to sell or purchase foreign currency having a total notional principal amount of £10,531 million (at 31st December 1999 – £7,093 million). The majority of contracts are for periods of 12 months or less. At the end of the year the firm had a number of currency swaps in place in respect of medium- term debt instruments. Two medium-term notes issued in Japanese yen were swapped into floating rate US dollars. The 7.0 per cent US$350 million Euro note 2002 and the 2.0 per cent CHF 250 million Bond 2004 were both swapped into floating rate yen. Each of these swaps matures on a date close to the maturity date of the underlying instrument. 25
  26. 26. International growth strategy • As a leading global pharmaceutical company, GSK wants to establish more international commercialization capabilities. • GSK has established a new business model of prioritizing emerging economy investments in capacity and regulatory expertise to strengthen the company’s footprint in growth markets • Acquisitions- GSK says “ smaller firms come calling “. Acquisition reinforces GSK’s ongoing efforts to invest in and expand its business as part of the company’s strategy to globalize and diversify. Small drug companies squeezed by the credit crunch are turning to GSK to discuss being acquired. Some of the important acquisitions include: o Sirtris Pharmaceuticals Inc. o Cambridge biotech o Egyptian mature products business of Bristol Myers Squibb Agreement with AstraZeneca for Alvedon o ID biomedical corporation- major step toward fulfilling our mission of o becoming a leading global influenza vaccine manufacturer. • Vaccine Boost- with the flu season approaching, GSK has expanded its flu vaccine capabilities in North America. • Biotech Strategy- GSK is shifting more to a biotech approach, creating small units of up to 80 scientists to pursue development programs. Those groups will then apply for research funds from a central investment board. It plans to also set up a venture arm to invest in promising new therapies pursued by early-stage companies or set up small companies to focus on Glaxo drugs. 26
  27. 27. Revenues(Turnover) and Operating Profits of GSK’s multinational operations in USA, Europe and the other Revenues Operating Multinational (Turnover) profits in £ Segments in £ millions millions 2007 2006 2005 2007 2006 2005 USA 10400 11362 10,185 2,849 2,495 2,016 Europe 14,009 14,007 12,303 3,671 2,701 2,798 The other international sector 10,911 9,349 8,547 1,073 2,612 2,060 Total 35,320 34,718 31,035 7,593 7,808 6,874 27
  28. 28. GSK in the news GSK to lead the way with group Sipp GSK has become the first FTSE 100 company to offer members of its GBP5bn pension scheme access to a group self-invested pension plan (Sipp). The group Sipp, which will be provided by Legal & General (L&G), allows members to incorporate savings built up in the company’s defined benefit, defined contribution or share save schemes into a wide range of investment funds. Workers will be given access to 300 insured funds from 40 fund managers. The Government’s state saving scheme, set for launch in 2012, has prompted many employers to assess their benefit arrangements alongside a general desire for more integrated long-term saving options. This helps company to manage costs and liabilities and thus maintaining target debt to equity ratio. New generation of Sipps was becoming popular as people realized they could save more for retirement by including previously non-pensionable items, such as maturing scheme shares, into benefit arrangements. GSK and the IRS finally find relief with Zantac The primary issue in the GSK case was the transfer price at which the UK parent, GSK, sold drugs (primarily Zantac) to its US subsidiary. In a parent-subsidiary transaction such as this, the transfer price does not affect the overall profit of the group, but it does affect the overall taxes paid by the group. Thus, GSK is now more focusing on its pricing strategy which directly affects its sales plan and financial plan. Such transfer price strategy has to follow an arm’s length transaction. Harvard stem cell research gets boost; GSK promises $25 m GSK has agreed to sponsor at least $25 million in work at the Harvard Stem Cell Institute in Cambridge, one of the largest investments in stem cell research ever by a major 28
  29. 29. pharmaceutical company. As a part of five year agreement, GSK has agreed to support research at Harvard University and four Harvard affiliated hospitals to try to find cures for cancer, obesity, diabetes and neurological, cardiac and musculoskeletal diseases. Harvard officials said the parties will share the rights to any discoveries they make together, even though GSK is funding the work. Benefits on finance standpoint: • The company also agreed to help fund Harvard’s “seed grant” program, which supports early stage research. Although, GSK spent nearly $4 billion on R&D in 2007, this would add minimal amount to research budget of the company. As plenty of drugs in pipeline, GSK hopes to get through early stage research as soon as it can. • Stem cell research has huge potential to aid in the discovery of new medicines. With the patents expiration and generic drugs expansion, company really needs some new drugs to launch in the market to sustain growth. GSK’s new RFID pilot GSK recently announced that it has begun putting radio frequency identification (RFID) tags on individual bottles of HIV drug Trizivir which is one of the 32 drugs most susceptible to counterfeiting or diversion. Here are some of the benefits GSK hopes to attain to reduce costs: • Better authentication of the product includes electronic product authentication and electronic pedigree documentation • To gain a better understanding of how to implement RFID and capture its myriad business results • Targeted recalls • Improved inventory management, forecasting and planning • Better supply chain oversight Glaxo drug hits UK insurance hurdle 29
  30. 30. UK’s National Institute of Clinical Excellence, which decides what treatments are made available free to UK patients, is not recommending Tyverb’s use by the National Health System. Adoption of NICE’s recommendation would mean UK patients will be disadvantaged compared with patients in other European countries where drug is reimbursed. UK is the parent nation of the company and this is the place where GSK hopes to generate maximum revenues. NICE’s recommendation would hurt GSK’s strategy. Thus, GSK said it remains committed to working with NICE and the NHS to make the medicine available to patients in the UK. Somehow, GSK thinks that acquiring more costs related to Tyverb, would create positive net present value for the company if it succeeds to be sold in the UK. This is the reason why GSK proposed bearing the cost of treating all eligible patients with Tyverb for up to 12 weeks, with the NHS funding treatment only for those patients who benefited from the drug. 30
  31. 31. Conclusion GlaxoSmithKline Plc (GSK) is listed in the Dow Jones Industrial Index. Having a strongest R&D pipeline and a unique business model company’s stock is moving vertical form $44.63 in year 2004 to $59.35 in 2007. The stock has been very consistent with the market and with the better growth rate than other rivals in the industry. The stock price has been declining since Feb 2007 due to financial crisis in the market and has been trading around $35 now. But it did not hurt as much as the industry, which reflects the strong business model and financial stability of the company. Dec' 05 Dec' 06 Dec' 07 Earning Per Share 0.82 0.95 0.94 Dividend Per Share 0.44 0.48 0.53 P/E 11.96 In the year 2008, GlaxoSmithKline has raised $9 billion form the bond issue to finance its share buyback program. As the program is funded by debt issue it will affect capital structure of the company. As debt increases, the interest expense will be higher for the period of time but it will increase the value of the remaining shares. This will provide signal to investor that company’s share is fairly under-price and company sees price going up in near future. Strengths and weaknesses of company on finance stand-point • For GSK, earning per share (EPS) was $2.76 in 2003 and it has been increasing over the period of time. In the year 2007 the EPS was $3.72 and it’s expected to increase in the year 2008. • GSK is subject to risks associated with the pharmaceutical business model, including patent expirations, generic drug companies’ challenges, pipeline failures and clinical trial risks. • Large number of blockbuster drugs losing patent protection over the next few years providing significant opportunities for this sector. 31
  32. 32. • GSK’s increased collaborative works with IT companies to expand E-commerce and E-business, will lead company to reduce its operating costs significantly. • Company’s global growth strategy stands for the company’s growth in the future through acquisitions and investments in biotech companies. 32
  33. 33. Appendices o Regression analysis o GSK’s bond information o E-commerce articles o Consolidated financial statements o Multinational operations o News Articles 33