GlaxoSmithKline plc (GSK)

Karolina Lempert

4/15/07

Industry overview

The “consumer” segment of the healthcare sector is not a very strictly defined one. The largest companies in this segment manufacture and sell a broad range of products that promote wellness and good health. Some of them focus on the production of drugs, and these are both available over the counter and by prescription. In fact, unlike the major pharmaceutical companies, “consumer” healthcare companies tend to be more associated with brands you can come across at your local convenience store. Some of these medicines may be allergy, cold and flu remedies, pain relievers or even diabetes medication. Other products sold by consumer healthcare companies range from common household items to medical devices, such as first aid kits. The range within the “household items” is huge: baby care, household cleaners, dental care, beauty products, foods, etc. are all included. One of the most important industry drivers in this particular segment is innovation, because not only is that especially important in pharmaceutical production, but there is a great deal of competition in the household item market. Advertising is a key factor as well. After all, most people do not care about their brand of toilet paper or toothbrush, unless they are convinced to.

Porter’s Five Forces:

  • While there are a lot of similar companies and there is easy substitution on the consumer level, innovative, cheaper drugs will sell without too much rivalry. (opportunity)
  • Barriers to Entry in health care very high: high start-up costs, patent protections, significant product differentiation, long drug development scale. GSK is well-established (opportunity)
  • Threat of substitutes in Consumer Healthcare segment only
  • Supplier power: not really an issue
  • Buyer power of GSK’s customers: Costs paid by insurance plans limit consumer price sensitivity. The U.S. government is actually the largest consumer of medical supplies (through Medicare and Medicaid). Such an institution has a great amount of pricing power, and so this is often out of the company’s control (risk).

Business overviewfrom Yahoo! Finance

GlaxoSmithKline plc, together with its subsidiaries, engages in the creation, discovery, development, manufacture, and marketing of pharmaceutical and consumer health-related products. It operates in two segments, Pharmaceuticals and Consumer Healthcare. The Pharmaceuticals segment manufactures prescription drugs and vaccines that are used in various therapeutic areas, including central nervous system, respiratory, anti-viral, anti-bacterial, oncology and emesis, metabolic, cardiovascular, and urogenital. This segments primary products include Seretide/Advair for asthma and chronic obstructive pulmonary disease; Avandia group of products for diabetes, Lamictal for epilepsy and bipolar disorder; Wellbutrin, an anti-depressant; Zofran to prevent nausea and vomiting associated with chemotherapy and radiotherapy for cancer; Valtrex for herpes; Coreg for heart disease; Imigran/Imitrex for migraine and cluster headache, and Flixotide/Flovent, an inhaled steroid for the treatment of inflammation associated with asthma and COPD, as well as vaccines. The Consumer Healthcare segment offers over-the-counter medicines, oral care, and nutritional healthcare products. Its principal products comprise Lucozade energy and sports drinks; Aquafresh and Sensodyne toothpastes and mouthwashes; Panadol, a paracetamol/ acetaminophen analgesic; and Ribena, a blackcurrant juice-based drink. The company has strategic alliance with Theravance, Inc. to develop and commercialize novel medicines. GlaxoSmithKline operates in the United States, Europe, Japan, Asia Pacific, the Middle East, Latin America, Africa, and Canada. The company was founded in 1935 and is headquartered in Brentford, the United Kingdom.

In the pharmaceutical industry, GlaxoSmithKline is the second leading company in sales, right after Pfizer. Its global sales come to approximately $18 billion per year, and U.S. sales are responsible for $9.3 billion. Its most popular drug is Advair, an asthma medication which is the fourth top-selling drug in the nation, after Lipitor (Pfizer), Plavix (Sanofi-Aventis), and Nexium (AstraZeneca). It is one of the world leaders in vaccine development. Their pipeline is significant, with 158 projects in clinical development at the end of February 2007.

Management

Dr. Jean-Pierre Garnier, 59, CEO:

  • Vast amount of experience, especially in OTC drugs
  • Worked previously at Schering for 15 years, joined GSK in 2001
  • Experience here AND abroad. PhD in pharmacology from University of Louis Pasteur in France, Fullbright scholar, so he got his MBA from Stanford

Mr. Julian Heslop, 53, CFO

  • Less experience with pharmaceuticals and GSK, but he has plenty of financial/accounting experience

Dr. Moncef Slaoui, 47, Chair of R & D

  • Just became chair in June 2006, but has already contributed a lot to the pipeline
  • PhD in molecular biology and immunology from Belgium, postdoc at Harvard and Tufts
  • Authored over 100 scientific papers

competition

competitor / company description / implications for GSK
Johnson & Johnson (JNJ) / JNJ basically fits into the exact same category as GSK. Johnson & Johnson is responsible for pharmaceuticals (Both prescription and OTC) as well as medical devices and consumer brands. Some of its brands include: Tylenol, Benadryl, Listerine, Neutrogena and Ortho-Evra. / Competition in consumer brands and OTC drugs – painkillers, hygiene products
Merck (MRK) / Merck & Co., Inc. (Merck) is a global pharmaceutical company that discovers, develops, manufactures and markets a range of products to improve human and animal health. The Company’s operations consist of two segments: the Pharmaceutical segment and the Vaccines segment. Major drugs include: Gardasil, Januvia and Zostavax / Biggest concern is competition with Gardasil once GSK’s HPV vaccine, Cervarix, is released.
Kimberly-Clark (KC) / Kimberly-Clark’s focus is on consumer brands and a few medical devices. Some of its brands include: Kleenex, Scott and Kotex. / Some consumer brand competition, but not significant.
Pfizer, Inc. / Pfizer, Inc. engages in the discovery, development, manufacture, and marketing of prescription medicines for humans and animals in the United States, Europe, Canada, Asia, and Latin America. The Pharmaceutical segment provides products for cardiovascular and metabolic diseases, including Lipitor for elevated cholesterol levels in the blood; Norvasc for hypertension; Caduet for cardiovascular events etc / Because it sold its consumer healthcare segment, it is no longer a threat there; however, it puts a lot of money into R&D so it’s a major player in the pipeline race.

Financials

Income statement

Total Revenue: 5,959, 000, 000

Gross Profit (ttm):29.07B

Profit Margin (ttm):23.67%

Operating Margin (ttm):33.62%

Operating Margin growth (5 years): 29.9%

Gross Margin: 78.43 (5 year average: 78.24)

R & D growth: from 871 million to 980 million in latest quarter

Profit margin has been increasing, and is higher than the industry’s, so this attests to the company’s great earnings.

GSK seems to be putting more money in its pipeline this quarter, since there was a substantial increase compared to the previous quarters.

Operating margin is increasing as well, showing that the company can finance its fixed costs.

Balance sheet

Current ratio: 1.51

Debt to equity: 0.58

Return on equity (Net income/shareholder’s equity): 64.55 (from 40ish average)

Return on assets (Net income/total assets): 20.85

The current ratio indicates that the company can pay its short-term liabilities. I think that it is comfortably high, but not to the point where the company may be overwhelmed.

Both returns on equity and assets are high.

Cash flows

Operating: 8.59 B

Investing: - 3,171,000,000

Financing: - 4,145,000,000

The company is generating positive cash flow, though it looks like it’s putting a lot of money into investment lately. GSK seems to be setting up for major expansion.

valuation

  • Historically, very consistent. Slight drop in 2002-2003. This could be because research costs were very high in that year. Advair and Wellbutrin, two of Glaxo’s most popular drugs were released then.

key metric / GSK / comparison to industry / comparison to S&P 500 / implications for GSK
PE Ratio / 15.15 / 24.70 / 20.41 / The P/E ratio is at a very comfortable level. The stockholder is paying less for GSK’s earnings. This has been a trend for the past few years.
PE Ratio (high- last 5 years) / 24.30 / 44.90 / 35.63
PE Ratio (low- last 5 years) / 13.24 / 16.07 / 14.44
Price to Sales / 3.53 / 4.02 / 2.84 / It is very slightly lower than the industry’s, which means its products are in high demand. It has no difficulty selling its products, though it needs to be wary.
PEG Ratio (5 year expected) / 1.80 / 8/31 rank / PEG is among the highest in the industry. The stock is expensive, because people expect large future earnings. GSK needs to come through.
  • Great earnings
  • A lot of confidence in the company

investment opportunities

  • International influence
  • Huge growth in last year, especially in pharma sector: Fluarix/Flulaval: +60%, Advair: +11%, Infanrix/Pediarix:+29%, Avandia: +25%
  • Huge pipeline (breast cancer – including recent FDA approval for Tykerb, bird flu, weight loss, cervical cancer – recent application for FDA approval), also recently invested $13 Million in a new lab
  • No huge patent issues, “Son of Advair” is taking shape
  • Experienced management
  • Well-established (high barriers to entry)
  • Valuation (esp. P/E ratio) is favorable

investment risks

  • specificity of new drugs?
  • new drugs = side effects and recalls
  • Potential problems with FDA approval, process of drug manufacturing (risky)

investment recommendation

Buy at current price, with a target price of $67.