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October 30, 2016

GlaxoSmithKline Financial Analysis

Healthcare companies have a wide range opportunities as well as a myriad of challenges. The catch in creating these opportunities lies in solving the existing or the future societal problems in the medical field. For a healthcare company to fulfill this mandate, its management must endeavor to invest in research and development. GlaxoSmithKline is a healthcare company that has stood the odds and navigated through the murky waters of the dynamic business world to offer medical solutions for the health problems affecting the world’s population (Stahl, 2005).

The company has grown through mergers and takeovers to make one of the world’s largest healthcare companies with business operations across the globe. The management has slowly but surely maintained the basics of corporate governance by accepting liability for the actions of its employees as well as maintaining ethical standards that its rivals envy (Stahl, 2005). The shareholders of the company have been a happy lot as its share prices continue to soar to greater heights in each year.

The environmental degradation and pollution has proved a blessing in disguise for this company as it continues investing in research and development of respiratory diseases. The bioterrorism has also provided a new revenue channel for this firm through partnerships with various governments to conduct research on various viruses and bacteria. The sedentary lifestyle has also proved to be an opportunity for the company to provide preventive medicines for diseases associated with obesity. The company continues to stay ahead of its competitors through innovative healthcare products which it distributes at convenient locations within the globe. It has also attracted; developed and maintained talent and skills through its human resources, therefore making it a good company that employees are happy to work for.

Financial Analysis

Every financial manager wants to fulfill the profit maximization objective of the shareholders, and that is true for GlaxoSmithKline’s chief finance officer. One of the methods of improving the statement of incomes is through reduction of costs, and the increase of financial revenues (Paramasivan & Subramanian, 2009). The financial management of the company has recently embarked on a cost-cutting strategy to save up to 1 billion Euros in costs, according to Hirschler (2014) by reducing its staff in the United States. This was replicated by its main rival, Norvatis, whose management saved up to $1.6 billion in 2014 in restructuring; according to Ward (2015).

The company’s share prices have been moving as shown below;

The current price of the shares is $40.14 which is below the past twelve month’s average of $45.43. In the last twelve months, the share prices reached a high of $52.24 and a low of $35.10. The share market for these stocks is bullish (Hoggett, 2012) with investors holding the shares in anticipation of higher prices in the foreseeable future. The share prices have a median of $46.10.

The share ratio analysis for the company is as shown below;

The company’s earnings per share have been increasing and decreasing in alternate years, starting at 1.05 in 2011 and decreasing to 0.92 in 2012. It increased slightly to 1.13 before falling to 0.57 but settled at 1.74 in the last year. The price earnings ratio started at 53.57 and fell to negative 20.08 before increasing to 36.86 in 2013. In 2014 it fell to negative 79.26 but it increased significantly to settle at 329.83 in the final year. The price earnings growth started at 22.53 and fell to negative 12.43 before increasing to 22.82. It fell to negative 49.07 before settling at 204.19. The price to sales ratio started at 1.92 but fell to negative 0.17 before rising to 0.31. It fell again in 2014 to negative 0.68 but it rose again to settle at 2.81. The price to book ratio started at 11.76 and it fell slightly to 11.45 before rising slightly to 12.02. In 2014 it fell slightly to 11.95 before rising to 12.99 where it settled.

In comparison, Norvatis ratios were as shown in the table below;

The price to earnings ratio stood at 25.24 as compared to GlaxoSmithKline’s 329.83. Its price to sales ratio was higher than that of GlaxoSmithKline at 4.45 as compared to 2.81. The price to book ratio was also lower than that of GlaxoSmithKline at 2.67 as compared to GlaxoSmithKline’s 12.99.the basic earnings per share stood at 7.13 compared to GlaxoSmithKline’s 1.74.

SWOT ANALYSIS: ANALYZING GLAXOSMITHKLINE’S COMPETITIVENESS

In analyzing the firm’s competitiveness, one thing that stands out in its strengths is the advanced research and development of its products. The SWOT analysis shown below has the strengths, weaknesses, opportunities and threats faced by the company. GlaxoSmithKline is conveniently located with proximity to its markets across the globe. It has subsidiaries that manufacture its products on behalf of the parent company. It has an efficient distribution channel that allows the company’s products to reach the market in advance to minimize the stock-out costs. The company has continued to attract highly-skilled personnel while developing the skills of its existing human resources to ensure continuity and innovation which is part of its organizational culture.

The advancement in research and development of new products has allowed the company to develop a wide range of products which are classified into several categories such as prescription medicines, vaccines and consumer healthcare products (Stahl, 2005). The huge capital resources and financial stability of the firm has allowed it to invest heavily in research and development in its endeavor to solve medical problems.

The research and development has paid off with time as the firm charges a premium through high prices for its products. The customers are willing to pay the high prices because they have developed brand loyalty towards its products. Upon innovating new products, the company registers patents for the new product which allow it to produce the new product exclusively for a given period of time as stipulated in the patent. It also generates revenues for licensing some manufacturers to produce some products on its behalf in foreign markets. With operations in all the continents of the world, the company has developed a large customer base for its products especially in the consumer healthcare sector.

The corporate bond

GlaxoSmithKline issues a corporate bond on 19th December 2001. It will mature on 19th December 2033 with a fixed coupon rate of 5.25% paid bi-annually which has a single redemption date. The minimum denomination for the bonds was 1000 and the denomination currency was the Great British Pound.

References

Bacon, F. (2010). Corporate financial management. Acton, MA: Copley Custom Textbooks.

Ross, S., & Westerfield, R. (2005).Corporate finance (7th ed.). Boston: McGraw-Hill/Irwin.

Paramasivan, C., & Subramanian, T. (2009). Financial management. New Delhi: New Age International (P).

Stahl, G. (2005). Mergers and acquisitions: Managing culture and human resources. Stanford, Calif.: Stanford Business Books.

Hoggett, J. (2012). Accounting (8th Edition.). Milton, Qld.: John Wiley and Sons Australia.

GlaxoSmithKline PLC ADR GSK (U.S.: NYSE). (n.d.). Retrieved October 30, 2016, from http://quotes.wsj.com/GSK/financials/annual/income-statement

GlaxoSmithKline PLC ADR GSK (U.S.: NYSE). (n.d.). Retrieved October 30, 2016, from http://quotes.wsj.com/GSK/financials/annual/balance-sheet

GlaxoSmithKline PLC ADR GSK (U.S.: NYSE). (n.d.). Retrieved October 30, 2016, from http://quotes.wsj.com/GSK/financials/annual/cash-flow

In, B. O. (n.d.). GSK Key Statistics | GlaxoSmithKline PLC Common Stoc Stock - Yahoo Finance. Retrieved October 30, 2016, from http://finance.yahoo.com/quote/GSK/key-statistics?p=GSK

In, B. O. (n.d.). GSK Historical Prices | GlaxoSmithKline PLC Common Stoc Stock - Yahoo Finance. Retrieved October 30, 2016, from http://finance.yahoo.com/quote/GSK/history?p=GSK

Novartis AG ADR NVS (U.S.: NYSE). (n.d.). Retrieved October 30, 2016, from http://quotes.wsj.com/NVS/financials

GSK to axe U.S. jobs as part of $1.6 billion cost cuts: Sources. (2014, November 30). Retrieved October 30, 2016.

http://www.reuters.com/article/2014/11/30/us-gsk-usa-cuts-idUSKCN0JE0BL20141130

Novartis leads way for big pharma cost-cuts - FT.com. (n.d.). Retrieved October 30, 2016.

http://www.ft.com/cms/s/0/8dafdef0-c574-11e4-bd6b-00144feab7de.html#axzz3mwtQYz1q

AG99 GLAXOSMITHKLINE CAPITAL PLC 5.25% GTD NTS 19/12/33. Retrieved October 30, 2016, from http://www.londonstockexchange.com/exchange/prices-and-markets/retail-bonds/company-summary/XS0140516864ZZGBPUKCP.html

Ratios & Margins Novartis AG ADR

All values updated annually at fiscal year end

Valuation

P/E Ratio (TTM) 25.24

P/E Ratio (including extraordinary items) 25.53

Price to Sales Ratio 4.45

Price to Book Ratio2.67

Price to Cash Flow Ratio 18.47

Enterprise Value to EBITDA 15.8

Enterprise Value to Sales 3.8

Total Debt to Enterprise Value 0.1

Total Debt to EBITDA 1.91

EPS (recurring) 7.24

EPS (basic)7.13

EPS (diluted) 7.02

Stock Price Target GSK

High$52.24

Median$46.10

Low$35.10

Average$45.43

Current Price$40.14

RATIO ANALYSIS OF STOCK EARNINGS

20152014201320122011

EPS (Basic)1.740.571.130.921.05

EPS (Basic) Growth2.0419-0.49070.2282-0.1243-

Basic Shares Outstanding48314808483149125028

EPS (Diluted)1.720.571.110.91.03

EPS (Diluted) Growth2.0415-0.48740.2255-0.126-

Diluted Shares Outstanding48884865491949895099

Price Earnings Growth204.19-49.0722.82-12.4322.53

P/E Ratio (TTM) 329.83-79.2636.86-20.0853.57

P/E Ratio (including extraordinary items)265.05-63.7029.62-16.1324.25

Price to Sales Ratio2.81-0.680.31-0.171.92

Price to Book Ratio 12.9911.9512.0211.4511.76

Price to Cash Flow Ratio35.1233.2734.1931.2630.88