‘How well do GSK balance demands for shareholder value with the need for corporate social responsibility?’
stg1993
Seminar2GSKFinancials-2017.pptSeminar 2: GSK Financials
International Business Analysis Project
BMAN33000
Sohrab Moshiri
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Seminar Plan
- Recap of previous lesson, go through GSK’s changes of strategy, and review types of financial ratios (10 mins)
- Get in three groups of 2-5 people to discuss questions (10 mins)
- Present answers (5 mins each group)
- Discussion (5 mins)
Recent threats to GSK’s finances: Safety Issues
On Rotarix
- “The FDA has raised a red safety flag on GlaxoSmithKline’s Rotavirus vaccine Rotarix. The agency is reporting that preliminary data from a new study indicates that the vaccine could raise the risk of intussusception
- A potentially lethal bowel problem that can block or twist the intestines in infants.” – Fierce Vaccines, September 23, 2010
Intussusception = an instance of the inversion of the intestine within another
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Recent threats to GSK’s finances: Safety Issues
On Avandia
- “FDA officials called for the "readjudication" of research on Avandia in 2010 after a team led by Cleveland Clinic cardiologist Dr. Steven Nissen analysed the collective results of 42 smaller clinical trials.
- Nissen's team concluded that diabetics taking the medication were at 43% greater risk of suffering heart attack or death than were patients who controlled their diabetes with the older drug metformin, sometimes in combination with the diabetes drug sulfonylurea.” (LA Times, 2013)
GSK – Changes of Strategy
- Diversification and refocusing on core business
- Emerging markets
- Expand the business in India
- Sales of consumer products – Lucozade and Ribena
- Sold the business to Suntory for $1.35 billion
- Sales of consumer healthcare products – headache tablets (OTCs) and toothpastes
- Mergers & Acquisitions
- Merger with Wellcome in 1995 and SmithKline Beecham in 2000
- Stiefel Labs (bought at $2.9 billion in 2009)
| Zantac sales | Zantac sales as a % of overall company sales | Zantac sales as a % of therapeutic segment (anti-ulcerant/metabolic & gastro-intestinal) | Annual change in Zantac’s sales | |
| £ million | % | % | % | |
| 1980 | 0 | n.a. | n.a. | n.a. |
| 1981 | 0 | n.a. | n.a. | n.a. |
| 1982 | 37 | 4.3 | 100.0 | n.a. |
| 1983 | 97 | 9.4 | 100.0 | 162.2 |
| 1984 | 248 | 20.7 | 100.0 | 155.7 |
| 1985 | 432 | 30.6 | 100.0 | 74.2 |
| 1986 | 606 | 42.4 | 100.0 | 40.3 |
| 1987 | 829 | 47.6 | 100.0 | 36.8 |
| 1988 | 989 | 48.0 | 100.0 | 19.3 |
| 1989 | 1,291 | 50.2 | 100.0 | 30.5 |
| 1990 | 1,401 | 49.1 | 100.0 | 8.5 |
| 1991 | 1,606 | 47.3 | 100.0 | 14.6 |
| 1992 | 1,807 | 44.1 | 100.0 | 12.5 |
| 1993 | 2,172 | 44.1 | 100.0 | 20.2 |
| 1994 | 2,442 | 43.2 | 100.0 | 12.4 |
| 1995 | 2,255 | 32.2 | 100.0 | -7.7 |
| 1996 | 1,931 | 23.2 | 99.2 | -14.4 |
| 1997 | 1,375 | 17.2 | 99.6 | -28.8 |
| 1998 | 757 | 9.5 | 99.5 | -44.9 |
| 1999 | 640 | 7.5 | 98.9 | -15.5 |
| 2000 | 575 | 3.2 | 46.7 | -10.2 |
| 2001 | 505 | 2.5 | 34.1 | -12.2 |
| 2002 | 382 | 1.8 | 26.7 | -24.4 |
| 2003 | 328 | 1.5 | 23.0 | -14.1 |
Q1 Answer
- From mid-1980s until mid-1990s, Zantac was a big contributor to GSK’s initial success.
- However, as the patent of Zantac runs out, the sales contribution from the drug also lowered,
- Depending on one blockbuster is not sustainable.
- It can thus be assumed that such formula for success cannot be easily replicated today, especially after the many controversies that Big Pharmas are facing, for example safety issues with drugs.
- Additionally, many governments also are urging Big Pharmas to focus on smaller health issues rather than on Blockbusters.
- Therefore, even if the formula of relying on Blockbusters are to be replicated by pharmaceutical firms now, the external environment are not favourable for it.
Q2
From the company tables in the excel spreadsheet;
Provide a line by line analysis of Glaxo’s financial results (i.e. turnover, margins, costs, ROCE etc.) since the late 1980s; how does this fit together into a current (post 2000) story
What does the 1995 acquisition of Wellcome and the 2000 acquisition of Smith Kline Beecham fit into the story? And how well have GSK performed since the merger with SKB?
Q2 Answer
- There are anomalies in the tables for the years 1995 and 2000. Both years are when GSK conducted mergers. However, the following years, the graph flattens, and at some points they go to negatives.
- It shows that the M&A strategy was not, as the company claims, for the betterment of the company and for production; but rather to make the short-term numbers look good.
Ratio Analysis
| Liquidity Ratios (Top management –Acquisitions, merger, and banks) |
| Quick ratio (Acid Ratio) = (Current assets – stock) ÷ liabilities Current Ratio = Current Assets ÷ Current Liabilities |
| Gearing (Investors, pension funds, consultancy) |
| Gearing Ratio = Long term loans ÷ Capital employed x 100 Debt to Equity (Solvency) = Total Debts ÷ total equity x 100 |
| Investment |
| Earnings per share = profit after tax ÷ number of shares Price earnings ratio = market price ÷ earnings per share Dividend yield = ordinary share dividend ÷ market price x 100 |
Gearing ratio refers to the fundamental analysis ratio of a company's level of long-term debt compared to its equity capital. The point when processing what amount of debt an organization is undertaking as contrasted with its equity, the debt to equity ratio is generally utilized.
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| Financial |
| Asset Turnover = Sales turnover ÷ assets employed Stock turnover = Cost of goods sold ÷ stock expressed as times per year Debtor Days = Debtors ÷ sales turnover x 365 |
| Profitability (Subjective voice for the pension funds and shareholders) |
| Gross profit = Effectively total revenue (turnover) – variable costs (OR Production costs) Net Profit = Effectively total revenue (turnover) = Gross Profit – Operating expenses – interest – depreciation Gross Profit Margin = Gross profit ÷ turnover x 100 Net Profit Margin = Net Profit ÷ Turnover x 100 Return on Capital Employed (ROCE) = Profit ÷ capital employed x 100 |
Bad pharma or Good pharma
Bad Pharma Vs Good Pharma
- Good’ Pharma argument:
- Patent system = ‘an incentive to invest’
- Virtuous circle: Patents => cash => R&D expenditure => new discoveries => better healthcare and improvement in social outcomes.
- Bad’ Pharma argument:
- Focus on Marketing,
- Not research-based activity;
- Lacks genuine innovation;
- Weak efficacy of products = ‘unjustifiable profiteering
China fined London-based Glaxo $489 million in 2014, the biggest corporate penalty ever at the time, and imposed a suspended prison sentence on an executive for bribing doctors.
You are not being tested on your accounting skills
You need to produce a clear and coherent narrative - illustrated with data where appropriate - about GSK and the pharmaceutical industry.
Question 3
3) Review tables 2, 4 & 11 in the case spreadsheet.
- Is GSK a financialized firm and does it deliver value to shareholders?
- To what extent does the dividend payout norm represent a boon for shareholders and a problem for GSK?
- What is GSKs current strategy (as announced in recent company documents/interviews), and are analysts convinced by it?
Q3 - Answer
- There are many indicators that are telling you the company is financialized. E.g. the dividend payout is increasing even though the company’s share price is lowering.
- This indicates that the company wants to attract/retain potential investors/existing investors by offering them dividend. The retained earnings figures are also lowering, indicating that instead of reinvesting the company’s funds for production, GSK is distributing the funds as dividends.
- When you look at GSK’s current strategy, they highlight on the need to R&D.
- However, the numbers are saying otherwise. They are more focused on their shareholders, rather than their end consumers. These are all examples of how companies are becoming more financialized. In GSK’s case, rather than continuing to research and develop for better drugs and better products, they are focusing on their shareholders whilst at the same time making smaller, less-risky products such as toothpastes and drinks.
Other References
- All the numbers from the GSK spreadsheet are taken from various Annual Reports. You can look for updated figures from latest reports.
- FiercePharma website is a credible source with a lot of information on the pharmaceutical industry
