A Financial Review: Pharmaceuticals Industry

A Financial Review:
Pharmaceuticals Industry
GSK, Merck & Co, Novartis

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Hangzhou- Team 12 Birdman Sachs 

Presented to: Bill Carlile
Prepared by: Dušan Nešic, Didem Gürbüz, Errin Verani, Graeme Wilson, Roby Camagong

GSK, MERCK & CO, NOVARTIS

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Financial Review
This Financial Review discusses the in-depth analysis of the operating and financial performance of the three companies in the
Pharmaceutical Industry, namely- GlaxoSmithKline, Merck & Co, and Novartis. It compares the results of the companies from the
past 5 FYE in relation to the financial ratios, industry economic indicators, company trends, business strengths and weaknesses,
and management strategies.

Industry Overview
In a competitive globalized economy, the pharmaceutical industry is one of the most influential movers in the developed
and developing nations. The business of the pharmaceutical industry is highly dependent on the company’s application for
patents. The patent will grant the company exclusive manufacturing rights by which the drug developer can recover their
investment costs from. Last year, the pharmaceutical industry has stumbled upon major patent conflicts and stricter measures in
product development imposed by FDA1. Despite these hurdles, the market players in the pharmaceutical
industry still posted relatively impressive growth figures. Moreover, Moody’s has furthered that the outlook
of the industry will remain stable for the next 12 months with the possibility of being rated as “positive” if
Industry Market
the companies maintain higher profit margins2.

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Value!
$476B (up 33%)!
by 2020

Aside from the application for patents, the business of the industry inordinately relies also on
the legislation direction of the government. The “Obamacare” health law that will bring millions of
uninsured Americans health benefits which began in January 2014 can be a critical factor in boosting
the sales and balance sheet of the pharmaceutical companies in the US. Global Data of London forecasts
the pharmaceutical market value to climb from $359 billion in 2012 to $476 billion in 2020, posting a 33%
increase over an eight-year period that can create the largest market of the industry3. Like many other countries, U.S. is
expected to experience growth in its elderly population, which can be a factor to the corresponding increase in healthcare
demand. The data posted by Moody’s and the legislation of Obamacare indicates that the pharmaceutical industry still has a
great deal of growth potential.

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GlaxoSmithKline (NYSE:GSK)!
Company Overview

Offices
in115
countries

$44.4Bn
Revenues

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$128.41B
Market Cap

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GSK was founded in 1924 and headquartered in UK. The company operates on a wide array of pharmaceutical
businesses from manufacturing, distributing, and trading globally. Its considered an influential player in three major business
namely- pharmaceuticals, vaccines, and consumer healthcare. (Exhibit 1 for GSK’s Stock Performance and Exhibit 2 for the
breakdown of GSK's three core businesses) Moreover, GSK also operates as a science-backed global healthcare corporation
that researches and develops innovative products and medicines. The company has successfully diversified its lines of
businesses through aggressive acquisitions and internal growth strategy. It also offers prescription medicines that span across
different therapeutic areas. With its vast geographical reach of 115 countries of sales offices and research centers, the company
was able to distribute almost 4 billion packs of products to 150 countries every year4.

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Corporate Governance
The top institutional stockholders of GSK comes mostly from big institutions with 11.06% ownership and big hedge
funds with 4.24%. After analyzing the executive committee and board’s backgrounds, it is safe to say that there is no apparent
conflict of interest. None of the corporate executive management team is a sizeable owner of the business which opens little
possibility of the agency dilemma. The company tries avoids this dilemma through compensating their employees by 56% in
bonuses on average. (Exhibit 3 for the List of Top Stockholders, Board Member’s Background, Corporate Governance
Framework, Executive Compensation Plan) In terms of corporate governance, GSK has elected a diverse board of members
carefully avoiding conflict of interests for the executive directors and non-executive directors. The percentage of insider trading
buying and selling stocks is relatively minute which has least effect on the company market performance5.
GSK maintains its social image as a company that improves the quality of life by enabling people to do more, feel better
and live longer. They’ve done it through a series of corporate social responsibility programs and partnerships. Recently, they
partnered with Pfizer to deliver massive healthcare treatments for HIV patients.

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Business Trend Analysis and Financial Highlights
Quality of Sales (2009-2013)
GSK’s sales has increased by 0.28% for FY2013. This has been brought by the growth in the US across the three
different businesses of the company while Europe sales is on a continuous decline (Exhibit 4 for GSK’s Sales by Segment). The
Pharmaceuticals and Vaccines business units benefited heavily from sales in the US, Immuno-Inflammation Products grew more
than 100%, and Anti-Bacterial Vaccines grew 30%. (Exhibit 5 for GSK’s Complete Pharmaceuticals and Vaccines Turnover).
Unfortunately, the decrease in their Healthcare business has offset the entire sales growth of the company especially with their
product Combivir down by 36%. (Exhibit 6 for the GSK’s Complete ViiV Healthcare Turnover) GSK has a consistent increase in
its sales for the past 5 years.

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Operating Profit and Cost Analysis (2009-2013)
In the most recent earnings results, GSK has managed to cap the year off by having a 19.08% increase in Net Income
and a 1% increase in Core Operating Profit. (Exhibit 7 for GSK’s Income Statement). The flat result in the operating profit has
been brought by the currency effects and operating margin declines. The negative impact of an expected 1.6% increase in
COGS offset the impressive 26.4% increase royalty income and lower R&D expense6. In addition, for an industry that is heavily
reliant on research, GSK’s R&D expenditures was managed properly which in turn boosted GSK’s rate of return in its
investments from 13% to 14%7. (Exhibit 8 for the Notes on R&D Expense of GSK). With this, investors received £1.12 GBP
earnings per share for FY2013. Historically, GSK’s gross margin is at a steady decline for 5 years with a CAGR of 0.1%.

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Cash and Free Cash Flow Analysis (2009-2013)
In terms of cash, GSK has spent £1.19 billion GBP in Capital Expenditures. As part of their strategic plan to grow, the
company is focusing on organic growth by investing steadily in their assets and being not as aggressive as before in
acquisitions. GSK’s free cash flow (FCF) stands at £1.66Bn as of the end of FY2013. This is a good indicator as the company
can fund its future growth without a large need for outside financing and can also stand as a risk buffer for legal settlements. In
order to stay afloat in the pharmaceuticals business, a company needs to have a lot of cash.

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Financial Structure
The company is financed by 24.5% of Equity and 75.5% of Debt. The equity is composed of all common stock with no
preferred stock. (Exhibit 9 for GSK’s Balance Sheet)
In the latest fiscal year, GSK has decided to lower down its long-term loans from £4.43 billion to £1.91 billion GBP. This
move will save the company interest expenses and preserve most of its operating profit to pay preferred and common
stockholders. (Exhibit 10 for GSK’s Reconciliation of Cash Flow to Movements in Net Debt). GSK is still currently properly
leveraged relative to its size and business due to a very high short and long-term net debt compared to its equity. From fiscal
year 2012 to 2013, GSK's accounts payable increased from $2.6 billion to $7.8 billion. This was due to GSK changing their
policy of payments to their suppliers, increasing the time from 60 days to 90 days, more in some cases8. This action has led to
great criticism, with allegations of "corporate greed.”

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Dividend Policy
GSK is a relatively mature company that regularly pays out quarterly dividends to its stockholders. This strategy has
helped the movement of their stock price for the past 5 years. (Exhibit 11 of GSK’s Stock Price Movement in relation to
Dividend Announcements) The stock has a 5.67% dividend yield with 2.43 billion shares outstanding with a payout of 101%.
Considering their Operating profits and Net income, it is safe to say that GSK has a fair and generous dividend policy historically.
The company should continue with their cyclical quarterly payments but should be careful and leave enough money for
reinvestments as patents are crucial in this industry.

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Trends and Future Growth
In 2014, GSK expects their earnings-per-share growth to be within the range of 4% to 8% on a constant exchange rate.
The sales from new pharmaceutical and vaccine launches look promising for the next years to come. In a product life-cycle
angle, this growth expectation is reasonable because it is safe to assume that these launches are still in their early stages.
(Exhibit 12 for Sales from New Pharmaceutical and Vaccine Launches) In addition, the management is confident that their 5
new approved medicines can strengthen the growth of their pharmaceuticals business9. This paper advises the management to
focus on their growth products and focus their distribution in emerging markets.


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Merck & Co (NYSE:MRK)!

$44.03B
Revenue

89,000
Employees

$160.38B
Market Cap

Company Overview
Merck & Co is one of the biggest pharmaceutical
companies in the world. The company is recently headquartered in New Jersey, USA. It was founded in 1891 as a subsidiary of
a German company named Merck KgaA. Since then, Merck has transformed to be one of the leading players in the
pharmaceutical industry in terms of revenue and market capitalization. Its main business comes from discovering, developing
and manufacturing human and animal health products. Like GSK, this company also offers medicines, vaccines and services to
cover broad ranges of health complications and infectious serious diseases. The company focuses on its four core operating
segments: Pharmaceutical, Animal Health, Consumer Care and Alliances10.

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Corporate Governance
The top institutional stockholders of MRK comes mostly from big financial institutions and private equity firms e.g.
Blackrock. The top institutional investors own 76.15% of the company. By examining the backgrounds of the executive and nonexecutive directors, conflict of interest has been carefully avoided despite the big share of ownership of institutions. Also, none of
the corporate executive management team is a sizeable owner of the business which opens the possibility of the agency
dilemma. The company avoids this by compensating the high-level executives via stock options. (Exhibit 13 for the MRK’s List
of Top Stockholders, Board Member’s Background and Current Board Memberships) MRK declares their commitment to make
difference in the lives of people globally through their products and services. The company publicly supports policies that push
for the advancement of public health and universal access to medicines and healthcare11. Like GSK, the percentage of insider
trading buying and selling stocks is relatively minute which has least effect on the company market performance12.

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MRK’s total sales for FY2013 is down by 7% due to the decline of their pharmaceutical (-8%) and consumer care (-3%)
businesses. In the pharmaceuticals business, the increased sales of Gardasil and Janumet failed to offset the decline in Januviathat being the greatest component of the company’s revenue. Geographically, the emerging market sales grew by 2% attributed
to the great demand in vaccines, acute care and diabetes products. However, it was partially offset due to the negative impact
of currency exchange13. (Exhibit 14 for MRK’s Revenue Breakdown) The company’s current sales have been unsatisfactory
when compared to the 14.3% 5-year CAGR from FY2012. Among the three companies, MRK is the only one that posted a
decline in its sales.

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Operating Profits and Cost Analysis (2009-2013)
In terms of cost analysis, MRK has produced a lower gross margin of 61.5% for FY2013 compared to 65.2% last fiscal
year due to the expected increase in COGS across the industry. There was also a decrease of $700M in marketing and
administrative expenses which is contradictory from the management’s aggressive stance of pushing new and existing products
and services14. FY2013 was a tough year for the company as it is its first time in five years to have a decline in their margin
(Gross Profit CAGR of 9.2% for the past 5 years). We believe that this decrease was a result of the company’s lower levels of
productivity in terms of sales and distribution activities. MRK’s R&D expenses had decline which was expected due to targeted
spending reductions and intensified focus on the company’s stronger businesses15. Next, MRK suffered from a 28.6% decline of
net income brought by the $2.3Bn acquistion-related and restructuring costs of the firm. (Exhibit 15 for MRK’s Income
Statement and Detailed Acquisition-related and Restructuring costs) It is important to know that these costs are not recurrent
because it is not part of their core operating business. Nonetheless, MRK’s management has been lenient in terms of costcutting and poor in managing costs of post-acquisition integrations.

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In terms of cash, the company spent $1.89Bn in capital expenditures which is lower compared to last year’s $1.95Bn.

MRK also has a FCF of $8.5Bn at their expense which represents 19.21% of their sales. Their high cash level reflects the
management’s efforts on targeted spending while investing only on assets that can generate substantial amount of revenues.

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Financial Structure
MRK is financed by 64% of Equity and 36% of Debt. The equity is composed of all common stock with no preferred
stock. (Exhibit 16 for MRK’s Capital Structure). Compared to GSK, MRK has a significantly lower level of debt despite its
increasing long term investments, primarily focused on expanding in China and India, but also having a significant presence in
South East Asia. From 2009, long term investment totaled $1.3 billion, and grew each year to $9.2 billion in 2013. Likewise, long
term debt increased dramatically from 2008 to 2009, ($3.9B - $16.1B), and remained high through to 2013, ending at $22.7
billion16. This indicates that much of the investments were financed through long term loans.

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Dividend Policy

MRK has consistently paid generous dividends to its shareholders even while their earnings have been depressed. The
company has returned $11Bn to the shareholders through strategic stock purchases and dividends. In comparison to GSK,
MRK has a lower dividend yield of 3.22% but a higher payout ratio of 118%17.(Exhibit 17 of MRK’s Stock Price Movement in
relation to Dividend Announcements) MRK should continue its recurrent dividend payments which satisfies their clientele who
prefer a stable dividend policy.

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With MRK’s ongoing divestments, we can expect to see a decent increase in the firm’s efficiency and profitability. The company
should be able to use their assets more efficiently by selling their non-core businesses. However, one ongoing concern is the
recurrent restructuring cost of the firm. MRK decided to buy AZ Electronic Materials (AZEM) last year to boost its offering of
specialty chemicals to strengthen their industrial-material unit. It raises concerns for investors as it reflects the management’s
judgement in M&A activities. The market was optimistic as the stock price rose 4.9%. However, if they keep losing money for this
fiscal year, the company will suffer poor margins that might significantly affect their stock price. In terms of product development
and R&D rate of return, MRK is still waiting for 3 drug patent application18. Uncertainty increases the risk of the MRK’s inability to
augment sales and recover costs. This review advises the management of MRK to focus on delivering its sales in their core
businesses and emphasise efforts on the post-merger integration with AZEM.

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Novartis (NYSE:NVS)!
Company Overview

#2 Sales
Worldwide

$57.9B
Revenue

$217.32B
Market Cap

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Novartis, founded in 1996, is a world leading
pharmaceuticals company based in Switzerland. It is a major research company that focuses on developing, manufacturing,
sales and marketing of diverse products. Similar to the other two aforementioned companies, Novartis offers a wide range of
healthcare products and medicines. But unlike the other two, this company also offer eye care services, diagnostic tools and
generic pharmaceuticals. This company operates on five key business segments: Pharmaceuticals, Alcon, Sandoz, Vaccines,
and Diagnosis and Consumer Health. Its ability to produce lives up to its reputation as one of the the top-performing
pharmaceutical companies worldwide with sales of $57.9Bn last FYE.

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Corporate Governances

The top institutional owners constitute 10.35% while the funds control 4.6%. Like the two other companies, NVS was
careful in electing their board of directors. The pharmaceutical companies seem to have a bias on the diversity of their nonexecutive directors. After careful examination and analysis on the current board memberships of the directors, it is safe to
assume that they represent the true interests of the majority owners of NVS. (Exhibit 18 for NVS’ Background of Board
Members and Exhibit 19 for the list of top stockholders) Novartis’ responsible business practices, like launching new CR
newsletter 2014, have earned its place in top 100 most sustainable companies in Corporate Knights Global19.

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At the end of FY2013, NVS has managed to increase their net sales by 4% ($57B) with constant exchange rates even
with constant pressure from generic drug competitors. The growth can be attributed to the strong upward momentum in their
new products in strategic geographic performances. First, new drug launches and approvals in 2013 has boosted the sales of
NVS. Sales of Zometa and Diovan grew by 7% despite the impact of the generic competition of almost $400M. The growth


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products of NVS added $4.8B in their total sales. Second, the company’s sales in the US and emerging markets are continually
improving in the span of the past 5 FYE. This past fiscal year, their products grew by 15% in the US and 10% in the emerging
markets. These are good performance indicators for NVS, as it shows that their sales are not tied into few several products in
selected geographies. In a risk standpoint, the company’s sales is sustainable as their core business of pharmaceuticals remains
strong and their growth products complement the growth. (Exhibit 20 for NVS’ detailed financial performance)

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Operating Profits and Cost Analysis (2009-2013)
NVS boasted a $10.9B operating income this recent fiscal year end which is a 5% increase from last year with constant
exchange rates. This result is impressive for the company despite of the industry-wide increase in COGS. NVS is the only one
among the three companies to produce an increase in their margin. This was due to the management’s effective R&D cost
management, lowered portion of LT debts, and focused innovation strategy20.

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Currently, NVS has a FCF of $9.98B which is 13% lower compared to last year. But this is not something that investors
should be concerned about as the FCF got lowered because of the slight increase in receivables and higher investments in
manufacturing and research facilities. Unlike MRK which focuses on investing in very specific assets, NVS is more aggressive in
its capital expenditures and R&D expenses ( net -9.38%)21. In the past 5 FYEs, NVS has shown strong operating cash flows of
7.34% growth average due to their stronger sales performance and adept capital budgeting decisions. In analysing the financial
performance of a firm, it is always considered that cash is king. With this in mind, NVS can be considered to be a very valuable
stock if we take the present value of its strong future cash flows. (Exhibit 21 for for NVS’ Cash flow statement)

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Financial Structure
NVS is financed by 59% of Equity and 41% of Debt. The equity is composed of all common stock with no preferred
stock. The firm has a 0.15X debt-to-equity ratio. Based on this, NVS might be missing on opportunities to improve their
profitability by adding debt to their balance sheet like most of its competitors. It seems to be a very defensive strategy for an
established global pharmaceutical company with strong sales growth and healthy margins. Nonetheless, its strong capital
structure of just 20% debt still managed to provide attractive return to their shareholders. No significant financing made during
the past three years. (Exhibit 22 for NVS’ Balance Sheet).

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Dividend Policy
NVS offers a dividend yield of 3.13% back to the shareholders. Recently, the board proposed an increased dividend payment of
$ 2.45 per share for 2013 which is up 7% from the past fiscal year22. Also, the payout ratio is also expected to increase from
66% to 74%. This is an attractive policy for the shareholders and investors. If this pushes through, NVS will be the most
generous in terms of payment dividend against the other two companies. (Exhibit 23 for the effect of dividend in NVS’ stock
price) This analysis supports the proposal of the board to change the dividend policy.

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For 2014, NVS sees their pharmaceuticals with mid-high single digit growth. The new growth products support this forecast
especially with their oral type 2 diabetes treatment reaching a $1.2B in full sales. As long as NVS can keep their strong
commercial execution it will strengthen their portfolio across a span of diseases in different geographies. Aside from that, NVS’
market share acquisition strategy in China and Russia paid off with double-digit growth rates. It is safe to expect the same line of
growth from these markets for the next few years. This report advises NVS to pursue more market acquisition strategies in
emerging markets.

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Financial Statement and Ratio Analysis

Liquidity
GSK

MRK

NVS

Industry Average

Current Ratio

1.1X

2.1X

1.2X

1.7X

Quick Ratio

0.7X

1.4X

0.7X

1.2X

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In a liquidity standpoint, MRK appears to be the most liquid among the three companies. MRK’s current liabilities only stand at
17% of the assets compared to GSK’s 31% and NVS’ 20.88%. Next, MRK’s cash and short-term investments represent
17.07% of the total assets which is substantially higher than that of GSK’s 8.07% and NVS’ 7.30%. MRK appears to be safe
from its obligations compared to the other two companies. As of FY2013, the inventory level of MRK, GSK, and NVS— 6.33%,
10.14%, and 5.76% respectively. Our analysis shows the inventory management expertise and adept demand forecasting of
MRK’s management by keeping just the sufficient level of inventory relative to the size of its business. Compared to the industry
however, it can be seen that Merck is a bit above the industry ratios, while GSK and Novartis are significantly below the
averages. This can partially be explained through the build-up of high inventory levels relative to sales for GSK and NVS which in
turn might indicate obsolescence of inventory or unnecessary write-offs.

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Asset Management
GSK

MRK

NVS

Industry Average

Total Assets Turnover

0.6X

0.4X

0.5X

0.6X

Fixed Assets Turnover

3.0X

2.8X

3.4X

5.8X

AR Turnover

4.9X

5.7X

5.9X

2.9X

Inventory Turnover

1.9X

2.4X

2.8X

N/A

In terms of efficiency, NVS shows the best inventory management in comparison to the other two companies. NVS on
the other hand seems to be lacking a stricter credit policy in their pharmaceuticals and vaccines business, since it's AR Turnover
is below the average and the other two competitors. However, GSK’s total assets were able to produce more sales compared to
the other two. However, averages in industry show that GSK is on the industry average with the TA Turnover, but is significantly
below it when it comes to Inventory Turnover. This can be explained by them having efficient management of fixed assets, but
not of their working capital.

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Debt Management
GSK

MRK

NVS

Industry Average

Total D/E

2.7X

0.4X

0.3X

0.8X

Total D/C

0.7X

0.3X

0.2X

0.4X

EBIT/ Interest Exp

10.4X

15X

22X

13.4X

Among the three companies, NVS has the lowest risk of liquidity crisis and solvency problems. The pharmaceutical
companies on average look like they have significant amounts of debt in their balance sheets to finance their capital investments.
However, it is really only a few companies, GSK included, that raise the average through the roof. The 90% trimmed mean of the
top 10 companies in the industry for D/E is 41%, much closer to MRK and NVS values. GSK has by far the most highly
leveraged capital, but their TIE is still reasonably high, so it can be assumed that their solvency risk is not high as their operations
continue to pay for their expenses. According to the analysis done in this paper, the three companies are in no danger of
defaulting on their obligations assuming that sales remain flat or growing because their products offer high return of investments.

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Profitability
GSK

MRK

NVS

Industry Average

ROA

11.7%

6.3%

8.0%

8.6%

ROE

60.9%

11.2%

14.3%

26.1%

Basic-Earning-Power

16.7%

8.4%

8.6%

N/A

EBIT Margin

29.3%

22.6%

17.5%

23.6%

GSK’s ability to generate revenue by using their assets efficiently was translated to its ROA of 11.7% for FY2013 and
13.4% on average for the past 5 FYEs. The results of GSK are superior compared to MRK and NVS. This is due to the strength


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of the new product launches of GSK and their 5 new patented drugs. ROE is also dramatically higher because of their low equity
capital structure. These numbers are impressive considering that the company’s assets are also growing at a flat rate. NVS and
MRK are significantly below the industry average in ROE only because of the few companies that have high debt leverage, GSK
included. The strength of its profitability will remain strong in FY2014 as the projections of their revenues from their innovative
products and services continue to remain bullish, when compared to MRK’s uncertainty in their patent applications and NVS’
almost flat sales growth. GSK is the most profitable among the three companies as of now but in serious threat because NVS
has recently got their 18 new drug patent applications approved.

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Industry Specific Numbers
GSK

MRK

NVS

Phase I*

27

N/A

4

Phase II*

46

19

27

Phase III*

31

16

23

Registration*

11

4

7

Approved*

8

3

2

GSK has the highest number of pipeline products. This explains MRK’s highest dividend payout compared to the other
two companies because of few investment opportunities and project developments. (*Please see Exhibit 24 for the definitions
of the different phases)

Market Performance

In terms of price movement, NVS gives 98.42% return in 5 years which is higher than GSK’s 55.45% and MRK’s
78.75%. Historically, the stock prices of these companies are in a steady incline after the financial crisis. It is also worth noting
that the increase in prices is confirmed by the volume which can mean that the stock price is not manipulated by a small group
of investors. Moreover, the three pharmaceutical companies performed weaker compared to DJIA and S&P500. This particular
industry takes a longer time to recover from the effects of the 2008 financial crisis when compared against the market. MRK has
a high P/E ratio of 37.81X compared to GSK’s 15.65X and NVS’ 21.88X (Exhibit 25 Market Performance of the three
companies) This ratio indicates that MRK might be overvalued by the market already.

Risk Analysis
Regulation and Currency Exchanges
The most prevalent and pressing issue to the industry as a whole, is the continuous trend of increases in legislative regulations
and political action/intervention on operations. This includes regulations on product quality, clinical trials, reporting methods, and
compliance; pharmaceutical companies must make enormous effort to remain within the legal operating zone, which is
constantly changing. This rapid upswing in regulation and accountability has caught many by surprise, as the traditional way of
doing business in China, i.e. “corrupt” from the Western perspective, has suddenly become corrupt in China as well. Next,
currency exchanges can severely depress and inflate the earnings of pharmaceutical companies due to global scale of research,
development, manufacturing and distribution.
Intellectual Property and Production
Pharmaceutical companies rely very heavily on their patents, and protecting their intellectual property. These large
pharmaceutical companies spend millions of dollars developing and researching their products. When a smaller firm copies and
starts selling the same drug for a drastically reduced price, often without license to do so, the large company has no way to
recoup the costs incurred developing the drug to begin with. This means a huge financial hit to their budget. Merck has had
extensive issues with patents theft and intellectual property rights loss, especially in the asian and Indian markets. The Indian
government has made policy that encourages local companies to produce low cost versions of popular western medicines and
drugs, in order to increase availability. Many pharmaceutical companies have complained, but enforcement is extremely weak.
Reputation
Thirdly, are issues that damage the future potential of the company to sell its products. A tarnished reputation can mean greatly
diminished profits or even the death of the organization. In the event that a product turns out to have negative side effects, or is
show to be dangerous for patients during clinical trials, there is always a very long and costly litigation process. Lawsuits are
filed, settlements are reached. Despite the fact that many pharmaceutical companies build the expected lawsuit costs into their
pricing structures, hundreds of millions in fines and multi billion dollar settlements add very obvious strain on the company’s
financial health. Not even to mention the public awareness and outcry over “dangerous drugs,” or “corrupt businesses.” The


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current headlining of GSK in the news is proof of this. Their company is being publicly called out by the government of China,
long well-known for its corruption, for its corrupt business practices. It would be hard to get consumers buy drugs from a
company that was kicked out of a country for being too corrupt.

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Summary of Investment Considerations!
NYSE:GSK!!
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NYSE:MRK!

Pros

-R&D Cost
Management!
-Strong Profitability

-High amounts of debt!
-Weak Europe Sales!
-High P/E (GSK might
be overvalued already)

-Strong Pipeline
Products!
-Strong US Sales!
-High Dividend Yield

-High amounts of LT
debt!
-Pricing Pressure from
Generic Competition

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Recommendation:BUY

NYSE:NVS! !
Short -Term

-Strong Price
Momentum!
-Increase in Sales!
-Good Inventory
Management

Long -Term

Pros

-Better Capital
Structure!
-Better Debt
Management!
-Strong Operating
Profit

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Cons
Short -Term

Pros

Long -Term

Long -Term

Short -Term

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Cons
-Lower FCF!
-Under Leveraged!
-High P/E (GSK might
be overvalued already)!

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-High COGS!
Generic Competition

Cons

-Posti-integration
acquisition potential

-Lower Margins!
-Decline in Sales!
-Lower FCF

-Increasing Demand
in Emerging Markets!
-High Dividend
Payout Ratio

-Weak Product Dev!
-High COGS!
-Poor Cost
Management!
Generic Competition

Recommendation: HOLD

Key Takeaways!
Industry Specific:
-Pharmaceuticals industry spends
aggressively in R&D
-Product development is of paramount
importance

! Class:
Finance

-Numbers tell the stories inside the
companies
-Dynamic analysis of qualitative and
quantitative data
-Due diligence is crucial in financial
analysis
-Benchmark is important in ratio
analysis

Recommendation: BUY


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APPENDIX

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Exhibit 1
GSK Stock Performance Compared to DJIA and S&P500

source: http://quotes.wsj.com/GSK/interactive-chart

!

Exhibit 2
GSK’s Core Business
Pharmaceuticals
GSK makes medicines available
in these areas:

Vaccines
GSK produces pediatric and
adult vaccines to prevent a
range of infectious diseases
including:

Consumer Healthcare
GSK have leading positions in
these

Infectious diseases

Hepatitis A and B

Oral Care

Cancer

Diptheria, tetanus, and whooping
cough

Nutrition

Epilepsy

Measles, mumps and rubella

Total wellness

Heart diseases

Polio

Skin health

Asthma and Chronic OPD

Typhoid

HIV/AIDS

Inﬂuenza
Bacterial Meningitis

source: http://www.gsk.com/about-us/what-we-do.html

!
!
!
!


BIRDMAN SACHS

10

!

Exhibit 3A
List of GSK’s Top Stockholders
Institutional
Holders
Dodge & Cox
Inc

Shares

Percentage

61,290,600

2.52

18,024,481

0.74

11,110,909

0.46

10,921,623

0.45

FMR, LLC

10,332,168

0.43

Primecap
Management
Company

10,078,655

0.42

8,412,337

0.35

8,122,652

0.33

Price (T.Rowe)
Associates Inc

6,934,811

0.29

Fiduciary
Management,
Inc.

6,137,991

0.25

Royal Bank of
Canada
Fisher Asset
Management,
LLC
State Street
Corporation

Bank of New
York Mellon
Corporation
Wells Fargo &
Company

Mutual Fund
Holders
Dodge & Cox
Stock Fund
Dodge & Cox a
International
Stock Fund
Vanguard/
Primecap Fund
Dodge & Cox a
Balanced Fund
FMI Large Cap
Fund
Price (T.Rowe)
International
Growth and
Income Fund
Price (T.Rowe)
Overseas Stock
a Fund
Invesco
Comstock Fd
Columbia Fds
Ser Tr IIColumbia
Dividend
Opportunity Fd
Fidelity Series
Growth &
Income Fund

Shares

Percentage

24,703,400

1.02

19,853,749

0.82

5,121,200

0.21

4,910,600

0.2

3,169,000

0.13

3,004,371

0.12

2,700,713

0.11

2,015,222

0.08

1,493,656

0.06

1,441,400

0.06

Exhibit 3B
Board Member’s Background


BIRDMAN SACHS

11

Exhibit 3C
Corporate Governance Framework

!
!

Exhibit 3D
Executive Compensation Plan

source: Annual Report 2013

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!
!
!


BIRDMAN SACHS

12

Exhibit 4
GSK’s Sales by Segment

Exhibit 5
GSK’s Pharmaceuticals and Vaccines Turnover

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source: 4th Quarter Financial
Results, 2013


BIRDMAN SACHS

13

Exhibit 6
GSK’s Complete ViiV Healthcare Turnover

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source: 4th Quarter Financial Results, 2013

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BIRDMAN SACHS

14

Exhibit 7
GSK’s Income Statement

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BIRDMAN SACHS

15

Exhibit 8
GSK’s Notes on R&D Expense

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!

Exhibit 9
GSK’s Balance Sheet

!!
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Equity

Debt

25%

75%

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source: 4th Quarter Financial
Results, 2013


BIRDMAN SACHS

16

!

Exhibit 10
GSK’s Reconciliation of Cash Flow to Movement in Debt


!

Exhibit 11
GSK’s Stock movement in relation to dividends announcement

source: Wall Street Journal

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BIRDMAN SACHS

17

Exhibit 12
Sales from New Pharmaceutical and Vaccine Launches


!

Exhibit 13A
MRK’s Board Member Proﬁles

!

Posi%on

Board
of
Directors

Current
Board
Membership
Pennsylvania
State
University,

Cornerstone
Chris0an
Academy,

Merck
&
Co.,
Inc.,
Exxon
Mobil

Corp.,
Pharmaceu0cal
Research
&

Manufacturers
of
America
Central
Park
Conservancy,
Inc.,
The

Partnership
for
New
York
City,

Cadence
Bancorp
LLC,
Merck
&
Co.,

Inc.,
RecoverCare
LLC,
University
of

North
Carolina
Endowment,
Lincoln

Center
for
the
Performing
Arts,
Inc.

Chairman
&
Chief
Execu0ve
Oﬃcer

Kenneth
C.
Frazier,
59

Lead
Independent
Director

William
B.
Harrison,
70

Independent
Director

Thomas
Robert
Cech,
66

Merck
&
Co.,
Inc.,
Grinnell
College

Thomas
Henry
Glocer,
54

Merck
&
Co.,
Inc.,
The
Partnership

for
New
York
City,
The
Interna0onal

Business
Council,
The
Cleveland

Clinic
Founda0on,
K2
Global

Consul0ng,
Inc.,
Morgan
Stanley,

Council
on
Foreign
Rela0ons,
Inc.

Independent
Director


BIRDMAN SACHS

18

Posi%on

Board
of
Directors

Independent Director

Rochelle B. Lazarus, 66


Leslie A. Brun, 62


Charles Robert Kidder, 69


Carlos Eduardo Represas de
Almeida, 69


Patricia F. Russo, 61


Craig B. Thompson, 60


Wendell P. Weeks, 54


Peter C. Wendell, 63

Current
Board
Membership
Merck & Co., Inc., General Electric
Co., The Blackstone Group LP, World
Wildlife Fund, Inc., Blackstone Group
Management LLC, Ogilvy & Mather
Worldwide, Inc., American Museum
of Natural History, NewYorkPresbyterian Hospital, The
Partnership for New York City,
Lincoln Center for the Performing
Arts, Inc.
NXT Capital LLC, SARR Group LLC,
Merck & Co., Inc., Broadridge
Financial Solutions, Inc., Automatic
Data Processing, Inc.
Merck & Co., Inc., Gulf Coast
Analytical Laboratories, Inc., 3Stone
Advisors LLC, Microvi Biotech, Inc.,
Morgan Stanley, Wildcat Discovery
Technologies, Inc., The Ohio
University, Wexner Foundation,
Nationwide Children's Hospital, The
Columbus Foundation, Inc.
Swiss Re AG, National Institute of
Genomic Medicine, Bombardier, Inc.,
Merck & Co., Inc., The Mexican
Health Foundation, Swiss
Reinsurance Co. Ltd.
Merck & Co., Inc., Hewlett-Packard
Co., The Partnership for a Drug-Free
America, Inc., General Motors Co.,
Alcoa, Inc., KKR Management LLC,
KKR & Co. LP
Charles River Laboratories, Inc.,
Charles River Laboratories
International, Inc., American
Association for Cancer Research,
Merck & Co., Inc.
Corning, Inc. Foundation, Lehigh
University, Corning, Inc., The
Corning Museum of Glass, Merck &
Co., Inc.
Princeton University, Merck & Co.,
Inc., ARTstor, Inc.


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BIRDMAN SACHS

19

Exhibit 13B
MRK’s Top Stockholders

"

Institutional
Holders
Capital World
Investors

Shares

Percentage

157,254,204

5.38

144,476,462

4.94

141,364,251

4.84

132,101,295

4.52

Franklin
Resources, Inc

87,625,703

3

BlackRock
Institutional
Trust
Company, N.A.

77,640,502

2.66

FMR, LLC

61,321,068

2.1

51,789,064

1.77

50,137,596

1.72

45,266,271

1.55

Wellington
Management
Company, LLP
Vanguard
Group, Inc
(The)
State Street
Corporation

Bank of New
York Mellon
Corporation
Dodge & Cox
Inc
Price (T.Rowe)
Associates Inc

"
"
"
"
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"
"

Mutual Fund
Holders
Washington
Mutual
Investors Fund
Income Fund
of America Inc
Vanguard Total
Stock Market
Index Fund
Vanguard
SpecializedHealth Care
Fund
Dodge & Cox
Stock Fund
Vanguard
Institutional
Index FundInstitutional
Index
Vanguard 500
Index Fund
Vanguard/
Wellington
Fund Inc.
SPRD S&P
500 ETF Trust
American
Balanced
Fund

Shares

Percentage

49,295,000

1.69

44,980,440

1.54

42,592,587

1.46

36,561,348

1.25

29,748,700

1.02

28,629,117

0.98

28,011,922

0.96

27,713,952

0.95

27,539,624

0.94

25,730,000

0.88



BIRDMAN SACHS

20

Exhibit 14
MRK’s Sales Breakdown

source: Merck’s Full Year Results 2013

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BIRDMAN SACHS

21

"

Exhibit 15A
MRK’s Income Statement


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BIRDMAN SACHS

22

Exhibit 15B
MRK’s Detailed Acquisition and Restructuring Costs

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"


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"

Exhibit 16
MRK’s Capital Structure

Equity

Debt

36%

64%

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BIRDMAN SACHS

23

Exhibit 17
MRK’s Stock movement in relation to dividends announcement


"

Exhibit 18
NVS’ Board Member Proﬁles

Position

Name

Current Board Membership

Chairman

Jörg Reinhardt, 58

Novartis AG

Independent Non-Executive Director

Dimitri Azar, 55


Andreas von Planta, 59

Vice Chairman

Ulrich Lehner, 68


Rolf M. Zinkernagel, 70


Wendelin Wiedeking, 62


Pierre Landolt, 65


Srikant Madhav Datar, 61


BIRDMAN SACHS

Association for Research in Vision &
Ophthalmology, Chicago
Ophthalmological Society, Novartis AG
Clinique Générale Beaulieu SA, Novartis
AG, Swiss National Insurance Co.,
Holcim Ltd., Raymond Weil SA, HSBC
Private Banking Holdings (Suisse) SA,
Socotab Frana SA
E.ON SE, HSBC Trinkaus & Burkhardt
AG, Porsche Automobil Holding SE,
ThyssenKrupp AG, Deutsche Telekom
AG, Novartis AG, Henkel Management
AG, Henkel AG & Co. KGaA,
The Genomics Institute of the Novartis
Research Foundation, Novartis AG
Novartis AG
Sandoz Family Foundation, Vaucher
Manufacture Fleurier SA, Parmigiani
Fleurier SA, Eco-Carbone SAS,
Amazentis SA, Syngenta Foundation
For Sustainable Agriculture, Emasan
AG, Novartis AG, Montreux Jazz
Festival Foundation, Axial Participações
e Projetos Ltda.
HCL Technologies Ltd., Novartis AG,
ICF International, Inc., T-Mobile US, Inc.,
T-Mobile USA, Inc., Stryker Corp.

24

Position

Name

Current Board Membership


Mun Tak Yang, 61

Vice Chairman

Enrico Cipro Vanni, 63


Ann Marie Fudge, 62


William R. Brody, 70


Bill T. Winters, 52


Charles Sawyers, 55


Verena A. Briner, 63

Asia Business Council, Hong KongUnited States Business Council, Esquel
Enterprises Ltd., The HongKong &
Shanghai Banking Corp. Ltd., Swire
Paciﬁc Ltd., Seoul International
Business Advisory Council, Novartis AG
Denzler & Partners, Eclosion2,
Advanced Oncotherapy Plc, Novartis
AG, Banque Privee BCP (Suisse) SA
General Electric Co., Novartis AG, The
Rockefeller Foundation, Simmons
College (Massachusetts), Infosys Ltd.,
Council on Foreign Relations, Inc., The
Brookings Institution, Unilever NV,
Unilever Plc
Novartis AG, The Salk Institute for
Biological Studies, International
Business Machines Corp., T. Rowe
Price Mutual Funds, Stanford University,
Baltimore Community Foundation, T.
Rowe Price International, Inc., BioMed
Realty Trust, Inc., The Genomics
Institute of the Novartis Research
Foundation, T. Rowe Price New
America Growth Fund, Novartis, Inc., T.
Rowe Price Real Assets Fund, Inc., T.
Rowe Price GNMA Fund
The Institute of International Finance,
Inc., Renshaw Bay LLP, International
Rescue Committee, Inc., Novartis AG,
Pension Corp. LLP
Novartis AG, Cold Spring Harbor
Laboratory, Inc.
Novartis AG


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BIRDMAN SACHS

25

Exhibit 19
NVS’ List of Top Stockholders

Institutional Holders

Percent
age

Shares

Dodge & Cox Inc

46,862,302

1.93

26,850,538

1.11

13,205,757

0.54

7,111,751

0.29

5,982,915

0.25

5,781,623

0.24

Franklin Resources,
Inc

4,038,055

0.17

Invesco ltd.

3,755,075

0.15

Managed Account
Advisors, LLC

3,705,273

0.15

UBS AG

3,698,961

0.15

Primecap
Management
Company
Brown Brother
Harriman & Co
Wells Fargo &
Company
Neuberger Berman
Group, LLC
Fisher Asset
Management, LLC

Mutual Fund Holders
Dodge & Cox Stock
Fund
Dodge & Cox
International Stock
Fund
Vanguard/Primecap
Fund
Vanguard International
Stock Index-Vanguard
MSCI Europe ETF
Dodge & Cox Balanced
Fund
BBH Core Select Fund
Vanguard Horizon
Fund-Capital
Opportunity Portfolio
American Mutual Fund
Inc
Franklin Mutual Series
Fund-Mutual Global
Discovery Fund
Vanguard Fenway FdsPrimecap Core Fund

Shares

Percen
tage

18,750,400

0.77

16,305,000

0.67

14,529,969

0.6

4,780,935

0.2

3,374,900

0.14

3,387,124

0.14

3,131,000

0.3

3,014,000

0.12

2,692,791

0.11

2,200,605

0.09

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BIRDMAN SACHS

26

"

Exhibit 20
NVS’ Detailed Financial Performance

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"

source: Company Financial Results 2013

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BIRDMAN SACHS

27

Exhibit 21
NVS’ Cash Flow Statement

source: NVS Annual Report 2013

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"


BIRDMAN SACHS

28

Exhibit 22
NVS’ Balance Sheet

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Equity

Debt

41%
59%

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"

source: NVS Annual Report 2013

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BIRDMAN SACHS

29

Exhibit 23
NVS’ Stock movement in relation to dividends announcement


"
"

Exhibit 24
Deﬁnition of Product Phases for the Pharmaceutical Industry

Source: Novartis Company Site

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"


BIRDMAN SACHS

30

Exhibit 25
Stock Price Movement of GSK, MRK, NVS

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BIRDMAN SACHS

31

ENDNOTE CITATIONS
!1

FDA. FDA’s stricter measures in product development. N.p.: n.p., n.d. Web. 7 Feb. 2014. <www.fda.gov/
Drugs/DevelopmentApprovalProcess/default.htm>
!2

Moody's. Outlook for Global Pharmacy. N.p.: Moody's, n.d. Web. 7 Feb. 2014. <www.moodys.com/
research/Moodys-Stable-outlook-for-global-pharmaceuti>
!3

Global Data of London. Healthcare Global Data. N.p.: n.p., n.d. Web. 7 Feb. 2014.
<healthcare.globaldata.com/pressreleasedetails.aspx?prid=863>
!4

GlaxoSmithKline. About Us. N.p., n.d. Web. 10 Feb. 2014. <http://www.gsk.com/about-us/what-wedo.html>.
!5

Financial Visualization. GSK's Insider Trading Percentage. N.p., n.d. Web. 19 Feb. 2014. <http://
finviz.com/insidertrading.ashx?oc=1131399&tc=7&b=2>
!6

GlaxoSmithKline. 2013 Fourth Quarter Results. N.p., n.d. Web. 10 Feb. 2014. <http://www.gsk.com/media/
press-releases/2014/results-announcement-for-the-fourth-quarter-2013.html>
!7

!8

Merck & Co. Merck & Co's Financial Results. N.p., n.d. Web. 15 Feb. 2014. <http://www.telegraph.co.uk/
finance/newsbysector/pharmaceuticalsandchemicals/9798947/Glaxo-disregards-suppliers-with-90-daypayment-terms.html>.
!9

!10

WSJ. Wall Street Journal. N.p., n.d. Web. 10 Feb. 2014. <http://quotes.wsj.com/MRK/company-people>

!11

Merck & Co. Merck & Co's Views and Positions. N.p., n.d. Web. 11 Feb. 2014. <http://www.merck.com/
about/views-and-positions/home.html>
!12

NASDAQ. N.p., n.d. Web. 19 Feb. 2014. <http://www.nasdaq.com/symbol/mrk/insider-trades/buys>

!13

Merck & Co. Merck & Co's Financial Results. N.p., n.d. Web. 11 Feb. 2014. <http://
www.mercknewsroom.com/news-release/corporate-news/merck-announces-fourth-quarter-and-fullyear-2013-financial-results>
!14

!15Merck

& Co. Merck & Co's Financial Results. N.p., n.d. Web. 11 Feb. 2014. <http://
!16

Pharmafile. Pharmafile News. N.p., n.d. Web. 16 Feb. 2014. <http://www.pharmafile.com/news/169532/
merck-invest-1billion-singapore-rd-and-manufacturing>
!17

Wall Street Journal. Wall Street Journal Market Data. N.p., n.d. Web. 11 Feb. 2014. <http://
quotes.wsj.com/MRK>


BIRDMAN SACHS

32

!18

!19Novartis.

N.p., n.d. Web. 13 Feb. 2014. <http://novartis.com>

!20

Novartis. Novartis Financial Results. N.p., n.d. Web. 13 Feb. 2014. <http://www.novartis.com/downloads/
investors/ﬁnancial-results/quarterly-results/q4-2013-media-release_en.pdf>
!21 !21

Wall Street Journal. Wall Street Journal Market Data. N.p., n.d. Web. 11 Feb. 2014. <http://
quotes.wsj.com/MRK>
!22 !22

Novartis. Novartis Financial Results. N.p., n.d. Web. 13 Feb. 2014. <http://www.novartis.com/
downloads/investors/ﬁnancial-results/quarterly-results/q4-2013-media-release_en.pdf>


BIRDMAN SACHS

33

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