Corporate finance, GSK

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2. Fin 6601
Fall, 2008
Nroop Bhavsar
Prerak Shah
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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
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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
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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.
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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
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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
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8. turnover. Higher inventory turnover stands for strong sales of company along with the
possibility of ineffective buying.
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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
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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.
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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
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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%
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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.
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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
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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
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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
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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
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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.
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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
SciQuest.com
SciQuest.com, 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 SciQuest.com’s e-marketplace for the purchase of third-party laboratory
suppliers via a private marketplace.
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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.
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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.
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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.
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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.
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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.
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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.
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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
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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
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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
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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.
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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.
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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.
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33. Appendices
o Regression analysis
o GSK’s bond information
o E-commerce articles
o Consolidated financial statements
o Multinational operations
o News Articles
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