GLAXOSMITH KLINE (FINANCIAL ANALYSIS)

GLAXOSMITH KLINE (FINANCIAL ANALYSIS)

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Executive Summary:

The overall performance of GSK is good in entire industry. It hit the highest net sales of Rs. 18 billion in recent year 2010 along with the highest profit of Rs. 1 billion.  Despite of crucial economical circumstances, GSK performance is appreciate able. The liquid cash generation has reached up to Rs. 3.5 billion which is more than industry average of Rs. 1.04 billion.

By equity, it is the largest equitizied company which has Current Assets of worth Rs. 9.6 billion. Although their Return on Equity is only of 9.8% in year 2010 and is beaten by SANOFI AVENTIS. The profitability is fluctuating but still its gross margin is high of 28% whilst Profit margin stands on 28% in fiscal year 2010 as facing a downward trend.

If its about Liquidity, GlaxoSmithKline is on top with Current Ratio of 2.7 where Working Capital is of Rs. 6billion.

So the overall efficiency  is good as the sales of industry is increasing. They have achieved an increase of 200% during last decade despite of critical economical factors and political influence. The market has a good potential in it but still it needs high level of Research and Development and government attention to make it attractive for investors. Government spending on health sector is poor in compare with other developing countries as it is fastest growing sector globally, it should be contemplated.

SECTOR EVALUATION:

Pakistan has a population of 176million** in 2009. An effort has been made to understand the expenditure made in our country in health by our government and people of Pakistan. According to (source) 2.2% of GDP is spent on health sector. Table is given here under to describe the disbursement of funds in their sector.(Fig in Billion)

	2000	2001	2002	2003	2004	2005	2006	2007	2008	2009
HEALTH EXP.	24	25	29	33	38	40	50	60	74	79
TOTAL POP.	0.142	0.145	0.148	0.151	0.159	0.162	0.166	0.165	0.173	0.176
PER CAPITA	172	176	195	218	239	246	302	364	428	448

 Source: Planning and Development Division

DISTRIBUTION:	2000	2001	2002	2003	2004	2005	2006	2007	2008	2009
HOSPITALS (30%)	7	8	9	10	11	12	15	18	22	24
MEDICINES (67%)	16	17	19	22	25	27	34	40	50	53
HAKEEM (2%)	0	1	1	1	1	1	1	1	1	2
HOMEOPATH (1%)	0	0	0	0	0	0	1	1	1	1
TOTAL	24	25	29	33	38	40	50	60	74	79
source
http://www.who.int/nha/country/pak/Pakistan_NHA_2005-2006.pdf

Our study has been based on to analyze the growth of pharmaceutical industry over seven years from 2004-2010. Within this industry we have concentrated to analyze the growth and financial performance of GlaxoSmithKline.

The population of Pakistan is spread as under Land area wise, Male / Female wise and Age wise respectively.

	Land area %	Population %
Baluchistan	43.6	5.1
Punjab	25.8	56.1
Sindh	17.7	22.6
N.W.F.P	12.8	15.7

Source: http://en.wikipedia.org/wiki/Demographics_of_Pakistan

Here is the graph that shows the comparison of province wise population distribution.

Following is the table population disbursement with respect to AGE wise.

Years	Total population	Population aged 0–14 (%)	Population aged 15–64 (%)	Population aged 65+ (%)
1950	37,542,000	40.3	54.1	5.6
1955	41,109,000	40.3	54.8	4.9
1960	45,920,000	40.4	55.3	4.3
1965	51,993,000	41.6	54.5	3.9
1970	59,383,000	42.6	53.6	3.8
1975	68,483,000	43.2	53.1	3.7
1980	80,493,000	43.4	52.9	3.7
1985	95,470,000	43.4	52.9	3.8
1990	111,845,000	43.7	52.5	3.8
1995	127,347,000	43.3	52.9	3.8
2000	144,522,000	41.4	54.7	3.9
2005	158,645,000	38.1	57.8	4.1
2011	173,593,000	35.4	60.3	4.3
http://en.wikipedia.org/wiki/Demographics_of_Pakistan

All these figures affect the various diseases that exist in different segments of population. Our study do recognize these segments and medical needs associated with this however the aspect of disease have been attached in annexure.

Pharmaceutical industry as such constitute the total expenditure where the table is given,

DISTRIBUTION:	2000	2001	2002	2003	2004	2005		2006	2007	2008	2009
HOSPITALS (30%)	7	8	9	10	11	12		15	18	22	24
MEDICINES (67%)	16	17	19	22	25	27		34	40	50	53
source:
http://www.who.int/nha/country/pak/Pakistan_NHA_2005-2006.pdf

The Ministry of Health determines the prices of medicines and authorize its division. It is generally stated by industry that though Dollar Rupee parity has moved from 51.37/$ in 2000 to 80.04/$ in 2009. Historical table of dollar rupee parity is attached in annexure. Though Rupee has devalued by 40% between 2000-2009 and continue to be so the prices of medical products have not been revised to that extend.

The industry has grown by 21% from fiscal year 2005 to 2010 however its profitability has deteriorated from 13% to 8% respective years. The GlaxoSmith financial performance during all years has been good and has been discussed in detail in this report.

The industry has no basic manufacturing capability in country other than simple packaging as such all medical products are being imported in bigger packs and deduced to capsules and tablets in Pakistan. From a financial point of view its an indication that industry is operating on concept of TRANSFER PRICING, all good being imported from parent companies and as real gross margin cannot be computed.

Global Industry overview:

The pharmaceutical industry is characterized by high level of concentration with more than ten giant multinational companies.

Company	HQ location	Revenue of pharmaceutical segment, mln USD	Total sales, mln USD	Share of pharmaceutical segment, %
Pfizer	NY, U.S.	46,133	52,516	87.85%
GlaxoSmithKline	UK	31,434	37,324	84.22%
Johnson & Johnson	NJ, U.S.	22,190	47,348	46.87%
Merck	NJ, U.S.	21,494	22,939	93.70%
AstraZeneca	UK	21,426	21,426	100.00%
Novartis	Switzerland	18,497	28,247	65.48%
Sanofi-Aventis	France	17,861	18,711	95.46%
Roche	Switzerland	17,460	25,168	69.37%
Bristol-Myers Squibb	NY, U.S.	15,482	19,380	79.89%
Wyeth	NJ, U.S.	13,964	17,358	80.45%
Abbott	IL, U.S.	13,600	19,680	69.11%
Eli Lilly	IN, U.S.	13,059	13,858	94.23%
Takeda	Japan	8,648	10,046	86.09%
Schering-Plough	NJ, U.S.	6,417	8,272	77.57%
Bayer	Germany	5,458	37,013	14.75%
Source: 2004 Annual Reports of the companies

From the table above, most of the revenue is generated by pharma products and rarely any company is of diversification nature. Johnson and Johnson although has a large revenue through consumable items.

Due to the rapid growth and high sales, these giants reinvestment is very high and cash utilization is mainly in mergers. For instances

Sanofi and Aventis

GlaxosWellcome and SmithKline

Major factors of Growth:

Although at this moment industry is showing a high increases in sales this performance will increase further in next few following years. Following factors could affect the growth of sale:

-          It is assumed that pharma industry is likely to be inelastic because death toll and child birth rarely decreases or it is increasing day by day.

-          If we talk about Asia or any under developed country, these are major contributors in industry sales.

-          Natural disasters are increasing; Tsunami, Katrina, Volcanic actions, earthquakes in Malaysia Indonesia. At the time of disaster sales can be increased by more than 100% and recovery of victims or patients gives a promising positive result to pharma industry.

-          Child birth and their illness under age of 4 to 5years is something that cannot be denied, likewise old age patients, cholesterol, sugar, heart patients in old ages is a fact which pushes the sale. According to survey, all diseases are increasing day by day.

-          In euro peon countries and countries that are under developed, AIDS is one of the most increasing illness and its vaccination or treatment requires large amount of drugs to be used.

Pharma industry is someway inelastic or growing industry, due to above factors and it shows rapid growth in next few decades.

Challenges:

One of the most potential challenge to any company lies within or without. Any blind can see three layers of competitions.

Big Pharma competes with each other. Every company is spending a huge amount on research and development; an essential component of this industry. First, obviously, “Big Pharma” companies compete among themselves. Although not all leading pharmaceutical companies cover all segments of pharmaceutical market, almost all of them are active in R&D and production of drugs in the segments with the highest potential – such as treatment of infectious, cardiovascular, psychiatric or oncology diseases.

Secondly, “Big Pharma” companies experience significant profit losses due to competition from the generic drug manufacturers. Opposite to the research-oriented pharmaceutical companies, which invest significant financial resources and time to develop new medicines, generic drug manufacturers spend minimum resources on R&D, and start manufacturing already developed by other companies drugs after their patent expiration. Because generic drug manufacturers do not have to recoup high R&D costs, prices of their products are usually much lower then those of major pharmaceutical companies; as the result, after patent expiration, generic drugs manufacturers capture significant market share, dramatically decreasing revenues of the “Big Pharma” companies.

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Price Control:

Its another important factor that could lead companies to go RED. Price regulations are different everywhere, it changes from countries to countries. Japan has very strict rules about price legislation and Pakistan has frozen its prices from last decade while European countries are supporting downfall in prices.

The majority of European countries control drug prices, and this downward pressure on prices has been increasing during last years. Japan has even stricter price controls than European countries; all prices are controlled by the government, and they are subject to a periodic price review.

So same product price may vary from place to place.

Patent Timeliness:

This requires an efficient management of research and development. It  takes years to complete a product research and sometimes it may be 15 years, so current patent expiration should be kept in mind and new product should be launched at expiration time of current product. In other case, company may face a loss due to unavailability of gap filling product. Patent protection is another aspect where its illegal to use by local drug dealers which can cause harmful effects on company’s reputation. Misuse of any drug by generic dealers can directly impact on company sales.

At present global market is dominated by USA which accounts for 28% market shares while Europe contributes the sale of 15%.

Due to expiry of patent enormously generic dealers have got advantage and a noticeable increase in generic sale can be observed. It is expected that their total revenue will reach worth $129 bn in 2014. The main reason is low price, generic drugs are 70% cheaper than equivalents, so potential markets like developing countries will support more and it will hinder the sale of giants.

In today market, people are seeking for differentiation, end users of product criteria has changed to health outcome with affordability.

PESTEL ANALYSIS:

Now lets analyze global pharmaceutical industry through PEST.

Political:

Growing political pressure is across the world which is enforcing government to put some more strict regulatory for saving prices of drugs.

Economical:

Global recession has a major contribution in downfall of world economics. Oil prices have reached at their highest level. Although pharmaceutical is effected by recession but big pharma are diversifying to Biotech pipelines where oil has a direct impact on it. Profitability is threatened here by increase in prices and frozen legislation.

Social:

Earlier public had no knowledge about pharma products but internet has changed all the images where every single person has access to information. So awareness compelled somehow to question or ask the reason of any product consumption. Patients ask doctors why to use it or to get some product with cheap prices.

Technological:

It has a vigorous impact on every industry. It has enabled two components in this industry:

-          Advance products

-          Customer Care or Direct Marketing

Through direct marketing companies are getting closer to consumers. Demand without any high cost in no time, like healthcare products.

Environmental:

Pharma companies need to link their plans and strategies with environmental issues. Here each company has special opportunity to build high customer reputation through standard corporate social responsibility. People are getting more and more aware about their surroundings and environmetal issues.

Legislation:

Almost every country is more concerned about their pharma products, government are providing thoughtful provisions to public through fixed prices or even affordable. Japan and Pakistan has one of the toughest regulations where government involvement is dominating. Prices are almost freezed.

Pakistan:

The worth of  market size of Pakistan is approximately $1.6billion, the growth in pharmaceutical industry was reckoned by 2.4% in fiscal year 2011.

Devastating flood or disasters ruined 1/5 of agricultural land and it caused labor absence of 6.6million by which a loss of $2.6bn Pakistan had to bear. It affect the manufacturing side and interrupted supply chain. Despite of heavy flood, exports had a growth of 28.6% while imports grew by 16.4%.

Global economical condition is severe and it could get worse in coming years that may trigger most of europe to go default which defintely would create an adverse impact on Pakistan pharma industry as most products are imported.

TOP TEN INFECTIOUS DISEASE WORLDWIDE

This fact sheet provides concise information on the top ten infectious disease in the developing countries.

In the 21^st century, there are still infections against which we are defenseless and which depite all the medical advances, still kill millions of people every year.

Let us recount the top 10 infectious diseases till now, which literally brought the world down to knees.

Pneumonia:

It can be produced by viruses or bacteria. It produces fever, shiver, sweating, cough with expertoration.

It affects 1% of the planets population and kills 3.5million people each year. antibiotics work in the case of the bacteria. Therapy includes oxygen, liquids and physiotherapy. The vaccine trimetropin sulfamethoxazole is effective against most frequent complications.

Malaria:

It is caused by protozoa spread by the female of the anophesis mosquitio. It triggers fever, shivering, abundant sweating, articulation, pains, sever headace and vomiting. It spreads during the rainy season when mosquitioes breed. Many treatments have been developed (mefloquine and Halofantrine products) but none has the total effectiveness as the parasite constantly mutates and there is no vaccine.

It is found in 500million people, 300 million of these cases are severe. In the east Africa children are bitten by the Anopheies carrying malaria 50-80 times a month. Anually 1.5million people die of malaria, a child every 30 seconds.

About 120 million people died of malaria since 1914 and the disease is endemic in 101 countries, mainly tropical in Africa, Asia and America.

Gonorrhea:

It is triggered by two bacteria and are transmitted sexually. In man, gonorrhea produces urinary incontinence, uretha pain,, redding, penis burning sensation and testicle inflammation. In women, it induces severe pain which reaches the trumps and uterus. After that it triggers skin eruptions, fever, hair loss and genitial condiloms, but if untreated system, leading to death.

62million people worldwide are affected, aged mainly 15-29 years, all over the planet, especially in urban areas and on low socioeconomic level.

The treatement consists in extremely powerful antibiotics which are extremely costly.

AIDS Hman immunodeficieny virus.

It leads to acquired immune deficiency syndrome which cripples a human’s immune system. AIDS have been catergorized as an epidermic by the CDC and the life expectency has been extended despite the lack of vaccination or cure. While on its own, the Ebola virus is much more deadly.

The symptoms some rather late and start with exhaustion and fever. After that  ganglion persistent diarrhea, pneumonia and weight loss. In the final stage, the patient stat is profoundly altered.

Each minute five new persons get infected with HIV, and the virus kills young people found in their productive period. It has killed 25million people since 1981 and about 3.3 million with HIV die between 2000-2020. Africa has lost 20% of its labor power. Lifespan in sub saharian africs is now of 47 years old, without AIDS it would have been 62.

In developed countries, 58% of the new cases are drug addicts whoe share syringes and 33% through unprotected sexual contacts, but in underdeveloped countries is mainly through unprotected sex and blood transfusion. 28million of the HIV infected are found in Africa and 0.5million in West Europe while 2.6 million in America.

Tuberculosis:

It is caused by the KOCH bacterium. One third of the people carry the Koch which spreads through the air and affects all the body, especially the lungs. It induces prolonged coughing, fever, tiresome and glossy eyes. It is worldwide spread but its advances is rampant in Bangladesh, Chine, Indonesia, India and Pakistan with other half of the new cases.

TB has a treatment, but it cannot be eradicated because of the emergence of multiresistant strains if the long and costly treatment of over 6months. The vaccine is effective in children, but useless in adults. It is more aggressive in women and persons between 15 and 45 years old. Current employed drugs are isonized, ethambutol and rifapentin.

It is as old as human kind, even found in mummies coming from Egypt and Peru. About 150million people are estimated to have died of TB since 1914.

It infects one third of the world population and each year another new 8million cases appear.

Each second a person dies of tuberculosis. Mutant strains are resistant to almost all drugs and kill about 50% of the patients.

Leishmaniosis:

It is produced by protozoa that spread through the bite of sand flies. The most severe type ps is KALA AZAR which infects 0.5 million people and incubation lasts some weeks. The parasite induces skin ulcers which extends all over the body and can produce obstruction or nasla hemorrhage. It causes severe lesions on the legs and a temporary or definitive physical disability. It is found mainly in Africa, C china, India, Latin America and outbreaks occur sometimes in Mexico and the US.

It infects 2 million people annually and about 12 million diseased are found worldwide mostly adult men.

Diarrhea:

It is a condition of having frequent loose or liquid bowel movements. Acute diarrhea is a common cause of death in developing countries and the second most common cause of infant deaths worldwide. The loss of fluid through it can cause severe dehydration which is one cause of death. Along with water, sufferers also lose dangerous amounts of important salts, electrolytes and other nutrients.

This kills around 2.2 million people each year. prescribed medications sometimes contain pain killers, such as morphine’s or codeine, to counter the cramps that can accompany diarrhea.

Typhoid Fever:

Is an acute illness associated with fever caused by the Salmonella typhoid bacteria. It can also be caused by Salmonella paratypi, a related bacterium that usually causes a less severe illness.  Typhoid fever is treated with antibiotics which kills the Salmonella. Death occurred from overwhelming infection, pneumonia, intestinal bleeding. With antibiotics and supportive care, mortality has been reduced to 1% within one to two day therapy and recovery within seven days. Prior to the use of antibiotics, the fatality rate was 20%.

SARS:

Severe acute respiratory syndrome has seen only one major outbreak in Asia. A few years ago. Supposedly the Chinese government created a vaccine that was effective in about two thirds of the test groups, however outside of that many of the treatments have proven to cause just as many problems as SARS itself.

In most cases, the disease in its viral pneumonia form has a fatality rate of about 70% with highest fatality rate among victims over the age of 65.

Ebola:

A discovery in the last 30 years, this strain is viruses has a fatality rate between 50-89%. A Canadian company recently reported that they have created a vaccine that is effective in 99 of the test cases of monkeys. Unfortunately, no vaccine or treatment has been approved for humans at this time.

Known to be devastating to both humans and animals. Ebola will kill a person with a week to two weeks usually from multiple organ failure or hypovelmic shock.

SWOT analysis:

Strength:

Global Manufacturing and Network:

Glaxosmith Kline has one of the largest market share in Pakistan and considered as a giant organization in global pharmaceutical industry. Its net sale worth 18billion rupees that makes a market contribution of 12.5%. although it has the highest dividend payout ratio and company is transferring its highest amount abroad.

Focused Research and Development Capabilities:  

Glaxosmith Kline has one of the most powerful research and development tools with them. Their brands and products simply depicts their extreme hard work on research as the products are highly qualitative. They hire one of the best researcher from the world to ensure the quality of product.

Strong Financial Performance:

The net revenue of GSK for the recent year is approx. 18bn Rupees, one of the highest revenues in the pharmaceutical industry. Their assets and flow of cash implies the ongoing business. They do have a strong financial performance as net income was Rs. 1 billion approx in 2010 that contributes about 14% of health revenue.

Diversified Product Portfolio:

They have a wide range of products and brands and cover most of the areas of pharmaceutical industry. As mentioned above, because of their high research and development capabilities they have products for almost every type of consumer, whether its about a minor injury or a serious disease. Their target is relatively higher than its competitors and it covers a wide range of market.

Good infrastructure:

The infrastructure of Glaxosmith Kline is one of the most effective and its efficiently designed in accordance with their objectives and goals. Their procedures to follow the ultimate goals of the company are being followed by every person working in the company. Utilization of capital and asset management is highly innovative and in its effective manner.

Highly skilled workforce:

Glaxosmith has one of the best staff working on their objectives. Their recruitment and selection procedure for employees is assure able. They visit high profile universities and go assessment tests that filters the most capable person and suitable employee for their task. A firms success is dependent on the efficiency of its employees.

Weakness:

There isn’t any consideration from Ministry of Health to increase the prices of products which is deteriorating the profit margins. The overall performance in terms of operations is high but financially its hard to have a stead profit.

Poor Marketing:

Hardly there is any direct marketing between company and end users of product, where market is most essential aspect. Early, there was dominance of MNCs and entry barrier is high.

There is any efforts on product marketing and it has really low attractive promotion that can make the product unprofitable as compare to others. Although the products are being advertised but there isnt any attractive promotions that can lead the product consumption to its highest level or at least the product that can gain the attention of consumers of patients.

Dependency:

It has a high dependency on only few of its product that are widely spread and used by consumers in the market. It has major products which has already gained the competitive advantage in the entire pharmaceutical market in Pakistan.

Uncertain R & D Outcomes:

Despite of their effective research work still the outcomes are uncertain, whether it will be successful or not. GSK ensures the most efficient results of their products so for that they have to go through various difficult stages of research work, which at certain point, is depicting uncertain results. One research of products sometimes require 5 to 10 years and it would be extremely demotivating that after a several years of research, the consequences are uncertain.

Increase in Prevalence of Counterfeits Drugs:

These days consumers are seeking a qualitative product with cheaper prices. The inorganic drug dealers use the patent products of brand that are expired, so they dont have to spend money on research work and that makes their product cheaper than the original and people give priority to those products.

Competitive Pressure:

In pharmaceutical industry, it has the highest potential and that leads a high rival between the giants. GSK has the immediate competitor in the market ABBOTT and Wyeth that are creating an intense environment in the market. High noon and Sanofi are another competitors which are growing their business with rapid speed.

Opportunities:

Among all therapeutic groups, most them have high potential growth while their market shares are relatively low. Form the table blow it can be clearly seen that opportunities where company needs to capitalize the situation and increase their sale growth by numerous segments, best of all is Blood and Blood covering this segment might give a vigorous increase in sale.

Emerging markets and expansions abroad is another opportunity which shows the great potential of pharmaceutical industry.

Sudan:

Starving children and disease heaven place where UN is already working, pharmaceutical products consumption is relatively high, expensive vaccines and doctors suggested products if their delivery is confirmed.

Afghanistan:

The 9/11 incident brought a huge massacre in Afghanistan, bombing and nuclear warheads that has been thrown on the local public causes serious diseases in local public. It gives a great opportunity to target market thoses area where the condition is severe.

Pakistan:

Recent flood and natural disasters brought contemplated results in Pakistan, although this market is highly potential relative to neighbor countries. India is facing some serious problem concerning HIV aids and other lethal diseases, their vaccination and a good researched product is another opportunity for companies to evolve and expand their business.

Europe:

People in Europe these days are more concerned about their health in older ages, as the awareness level is relatively high,  so they are searching for treatment of longer time period that will be beneficial in their old ages.

Growth in Emerging Markets:

These days, giants are doing mergers among them and its helps in improving the work efficiency of the company. Weakness of both merging companies are dissolved by each other and it encourages availing of opportunities. These days market of pharma has the highest potential and experts indications shows the growth in it. So it will be an opportunity to target market those areas which are still untargeted and has the potential. Oncology is the area which has a good potential.

Threat:

Following are challenges that company has to face where performing in pharma industry:

Devaluation of Pak Rupee:

Pakistani rupee has faced some serious problems in the last few years, where it was almost constant in the beginning of this millennium; democratic government could resolve this devaluation problem. US dollar has increased by almost 50% and purchasing power of consumers are badly effected, where they are seeking cheap and effective products.

High Imports:

As the value of Pakistani rupee has deteriorated, pharmaceutical products and their raw material is mostly imported, imports got an adverse impact. Most of the pharmaceutical companies are abroad based, and due to under development circumstances research work is done in foreign countries, raw material imports are forced. Even though finished products are mostly imported.

Control of government over prices:

Ministry of Health has freezed all the prices of medicines and other chemical related products which puts every company to cut their profits. Despite of high and reliable performance not a single reward is being offered to high performers. Ministry should show some leniency and relax the prices of products so that companies can get a motivation to increase their profit and perform more of it.

Political instability:

Regulaors and Ministers are changed every month and there isnt any steady political situation in Pakistan. Every new minister put some new regulations and more harsh than before.

Law and order situation:

Karachi is considered as a back bone of Pakistan but its law and order situation is worst that has driven many investors to put their business abroad. Pharmaceutical product marketing is based on volunteer camps and promotive activities in under developed areas but its situation dont allow the marketriers to risk their employees in that particular area.

Pakistan Industry Analysis:

 Last few years of the Pakistan economy; have suffered a lot due to bad economic conditions and also due to the war against terrorism. Furthermore the economy also saw the domestic inflation, slow economic growth and substantial devaluation of the rupee against the major currencies.

The overall industry is eroding as political conditions of country is instable. Ministry of Health is regulatory authority in Pakistan and it has freezed prices of pharma products since 2001 and not offering any incentive as well like research and development. Most of the raw material is imported and very few companies are manufacturing goods itself, while most are only doing packaging in Pakistan.

Total revenue of this industry is 1.6 billion dollar, on the other hand exports has reached 400 million dollar and government has set a target of increase in export to $600mn in next couple of year.

According to the official report, current elected government has provided license to 26000 medicines in these four year period that would mean 20 medicines per day are approved without any quality assurance. In accordance with historical data, only 29000 medicines were approved in last 60 years. It depicts the tough competition, although market potential is very high due to increase in birth rate and rapid population increase.

As ministry has freezed the prices of products but inflation is constantly impacting the other products like petrol, electricity and wages that has sky rocketing speed. So companies have to cut their profit to maintain their business, even some corporations find it difficult to cover their expenses.

Effect of Inflation on Business:

Inflations rates are very high in Pakistan as it was highest in 2009 that reached a percentage of 21% from 4.5% in 2002.

With all these high inflationary rates, Glaxosmith maintained its expenses in little percentage in correspondence with an increase of only 122% whilst inflation rate was high of 324% in only period of 5 years. In relation with sales, expenses are maintained and doesnt have any significant increase.

Following table show the trend of inflation in Pakistan:

There is another historical data that  show the complete picture of how inflation rates has performed in :

The significant figure in this complete time span is only in 2009 that reached to 21% approximately and lowest was in 2002 of 2.4%.

Impact Of Inflation on Currency Devaluation:

The value has rupee has significantly decreased in last couples of year. There is a noticable upward trend in currency devaluation in during last decade.

Following table shows the trend:

Highest closing of dollar value is in 2010 and then 2009, as most of raw material is imported from abroad which has deteriorated the profits of the entire industry.

Impacts on Profitability of GSK:

If we analyze the reduction of expenses, company has performed better. Difference of net profit margin and gross profit margin tells the utilization and expenses transperancy, company reduced its expenses to 5% in average.

Profitability has a little affect by inflation in other because management of GSK is appreciatable in such hard circumstances.

Its performance is good in respect to net profit margin. Although the margin is eroded in last couple of years but still more than industry average. Entire industry is affected by current political instability and regulations.

Pharmaceutical Industry Financial Overview:

Vertical analysis depicts the true picture of profit margin as below.

There is a noticeable trend going downward but its not only way to assess the performance of company.

During last six years, dollar value increased by 40% approx. While on the other side COGS has increased by only 15% and reached upto 75%. In horizontal analysis trend is highly observative and effect can be noticed of inflation and currency devaluation.

Following figure shows the comparison of industry average of net profit margin with GSK:

Profitability of company is deteriorating from last few years , although there is fluctuating trend in its profitability.

Earlier it was 16% that decreased to 6% a reduction of 63% nearly. Government policies are strict these days and regulators have freezed prices. Industry average is standing at 4% in 2009 while performance of GSK is 50% higher than industry.

The table above shows the difference maintained by GSK but in the recent year of 2009 parallel competition and difference has reduced alot, it would be better to call it negligible difference.

The following figures shows the performance of direct competitors in the market as NET PROFIT MARGIN.

As it can be seen that Sanofi couldn’t managed to maintain its expenses and finally deteriorated all its profit and it will be difficult to come back in next few years.

For further assistance, table is provided for reference

NET PROFIT MARGIN

	2006	2007	2008	2009
ABBOTT	16.90%	18.00%	4.80%	9.80%
WYETH	16.66%	11.62%	6.04%	3.77%
SANOFI	5.90%	1.90%	0.90%	0.06%
SEARL PAK	3.21%	3.02%	6.78%	9.54%
GSK	16.5%	16.0%	14.6%	6.2%
INDUSTRY AVERAGE	11.83%	10.10%	6.62%	5.88%

                                                Source: Annual Reports of respected Company

Moreover, reduction in profit margin is also impacting return on assets and equity. In the trend, management  increased equity to amount of double while profit is reduced to half of its value of only 5.6% that has a direct impact on Return on equity as well.

The performance of industry players can be analyzed through following graph:

Management must not reduce its profit or it may erode the confidence of investors or equity holders. Hence there is a fluctuating trend in Return on Assets, it could also be possible for company to reduce its assets or either increase their sales.

Following table shows the profitability of Glaxosmith Kline from period 2004-09

Suggestions:

There could be few possible alternatives to increase the profitability;

-          Write off the non operating assets

-          Selling or cut off the less operating centers

-          Expansion of plant may reduce return on assets, so there shouldn’t any expansions in fixed plants

-          Another aspect of low return could be increase in receivable collection period, so better to reduce it and recovery department efficiency can be assessed in this aspect.

-          Cash that is sufficient should be invested in new projects as its generation is likely good.

-          Stock in trade is significantly increased by thrice times and may impact or it could be perceived that sale is low is company is stocking its product more than demand.  In this respect, sales team can be criticized.

Industry Common Size Analysis:

Total market worth of pharma is $650billion while Pakistan stands at $1.64billion which makes a contribution of only 0.25%. in Pakistan, Glaxosmith is a market leader with market shares of 11.59%. the average growth of sales has increased significantly.  In doing common size analysis of combined listed companies following table can be abstracted.

	2005	2006	2007	2008	2009	2010
NET REVENUE	100.0%	100.0%	100.0%	100.0%	100.0%	100.0%
GROSS PROFIT	36.5%	34.2%	35.2%	31.2%	28.9%	28.6%
OPERATING PROFIT	19.7%	16.4%	16.9%	19.2%	13.6%	14.1%
PROFIT BEFORE TAX	19.5%	16.2%	16.7%	18.4%	12.8%	13.5%
PROFIT AFTER TAX	13.2%	10.8%	11.0%	12.1%	8.1%	8.2%

Source: Annual Reports of respected Company

It can be clearly noticed that Profit after taxation has deteriorated by almost 50% where reduction from 13.52% to 6% during last six years while there isnt any significant loss in operating profit. Profit before taxation is in severe condition and least in fiscal year of 2009. Analyzying table would lead to the fact that performance of industry was lowest in 2009.

There could be following possible reason:

Inflation:

The historical data from 1980 to till depicts that highest inflation was in 2009 where it reached to its peak preceding by high fluctuation as it remained lowest during last decade. Oil prices reached at the their highest value in 2009 which is shown in graph below.

Historical Consumer Oil Prices in Pakistan

Currency:

As the impact of inflation, dollar value rose and devaluation of paki rupee occurred. The adverse impact was due to fact that most of raw material is imported from china and other European countries.

 Following graph show the historical data about currency devaluation Pak Rupees vs US Dollars:

The average Gross profit and net profit was decreased in 2009 along with return on equity. .

The following figures shows the performance of direct competitors in the market as NET PROFIT MARGIN.

Net Profit , All figures in Billion Rupees

	2005	2006	2007	2008	2009	2010
GSK	19.3	16.5	15.7	14.6	6.2	5.6
SANOFI	33.8	32.6	27.8	24.3	24.2	28.5
WYETH	12.78	16.66	11.62	6.04	-3.77	1.13
ABBOTT	16.9	17.9	15.8	12.1	7.2	10.7
AVERAGE	20.695	20.915	17.73	14.26	8.4575	11.4825

Public Health programs under the supervision of government :

-          Immunization

-          AIDS control program

-          Malaria Control

-          T.B control

-          Prevention and Control of Blindness

-          Family Planning

-          Cancer Treatment

GLAXOSMITH KLINE PLC

Introduction:

In 2001, GlaxoSmithKline is a merger of Glaxo Wellcome and SmithKline Beecham and its mainly United Kingdom based multinational company that is considered as one of the giants pharmaceutical companies in the entire world.

The advent of today’s leading research based pharmaceutical company started with individual entrepreneurs of the 1800. The pioneering efforts laid the groundwork for growth  in the different companies that over the years led today’s Glaxosmith

Glaxosmith Kline combats depression, mental disorder that affects 22% adults in Pakistan, by successfully launching the central nervous system franchise with the anti depressant.

It supplies 71 million doses of vaccines , the largest shipment in the history of GSK biological to the Pakistan government for expanded program on immunization for eradication of polio.

Mission:

“Our quest is to improve the quality of human life by enabling people to do more feel better and live longer”.

Vision:

The opportunity to make difference to the lives of billions of people.

Value system and operating principles provide the necessary guidance on how we work at Glaxosmith.

The key to success is desire and passion to pursue Glaxosmith priorities expressed by business drivers.

While new medicines and products may originate in our international laboratories, brining those medicines and products to patients require the combined efforts of everyone else in the company. All of the staff have a responsibility to engage in the quest and to successfully deliver our promise.

Strategic Priorites:

By focusing on business strategies, four top priorities comes up which are following

-          Grow a diversified global business

-          Deliver more products of value

-          Simplify the operating model

-          Create a culture of individual empowerment

-          Building trust of customers

Global Business Strategy:

Management engage and attract the best  talent available in the market. To position GSK Pakistan as preferred employer in Pakistan, recruitment team visited 18 universities in 8 different cities and met over 1600 students.

Research and Development:

Glaxosmith has done 17 R&D trails which includes Phase ii and Phase iii. It also covered a wide range of therapy under clinical trials that has Oncology, Cardiology, Metabolic, Respiratory & Hematology.

Business Goal:

The ultimate goal of GlaxoSmithKline is to become the indisputable leader in the global pharmaceutical industry. There are three key challenges:

-          Improving productivity in R&D

-          Ensuring patients have access to new medicines

-          Reaching consumers beyond the traditional healthcare professional.

Manufacturing and Distribution:

Glaxosmith sells its prescription medicines through distributors, primarily to pharmacist, hospitals, government entities and other institutions. These products are prescribed by doctors, and dispensed to patients by pharmacies or used in a hospital environment.

Glaxosmith sales team provides value to the healthcare professionals. Well organized training is provided aimed at raising the standards of representatives knowledge.

Value in health care can only be achieved with appropriate treatment being administered to maximum number of patients.

Marketing initiatives aim to remain leader of new medicines from cost of treatment, proper diagnosis and knowledge about diseases and prospective options with effective and ethical marketing initiatives.

Manufacturing and Supply:

It manufactures a large portfolio of products ranging from tablets and toothpaste to inhalers and complex capsules in over 28000 different pack sizes and presentations.

By adopting leading edge practices, developing our people and focusing on performance, they ensure benefits from:

-          A secure supply of high quality products

-          Compliance with regulatory requirements and customer expectations.

-          Best in class cost

Financial overview of GlaxoSmithKline:

Net sales has increased with a constant growth rate and showed an upward trend with a growth rate of 8.9%  as it achieved a sale of Rs. 18bn in fiscal year 2010 with a net profit of Rs. 1.05bn. The board of director proposed a final cash dividend of Rs. 4.0 and 15% bonus share issue.

Well known products of Glaxosmith are following:

-          Augmentin

-          Amoxil

-          Sepratin

-          Panadol

-          Calpol

-          Iodex

-          Fefol

-          Actified P

-          Piriton

-          Betnesol

-          Dermovate

-          Horlicks

-          Polyfax

Capital Asset Pricing Model ( CAPM):

Risk free rate*--------------                                                           12.33%

Market Return**---------                                                                              19.5%

GSK Return***-----------------                                                    9.8%

Pharmaceutical Industry Return-----------                                              11.48%

Formulae:

Cost of Capital = Risk free rate + (Market Premium)*Beta

Market Premium= Market Return  - Risk free rate

Market premium would be  19.5%  less 12.33%

Market Premium is 7.17%

Calculation of Beta:

Pharmaceutical Stock Market return is 11.48% while GSK has a return of 9.8%

So Beta calculated as 0.65 that we have to adjust it further

19.5 / 11.48 = 1.65 Industry BETA

11.48 / 9.8 = 1.17* 1.65 = 1.93

So the adjusted beta of GSK is 1.93

Cost of Capital = 12.33% + (7.17%)*1.93

Cost of Capital = 26.18%

Note:

GSK is showing Cost of Good Sold at 74% of sales value against an industry average of CGS 64% of sales.

In case GSK is able to bring its CGS in line with industry average its Net Profit will increase , so will be its taxes. The return on capital will increase with increase in profit and cost of capital will come to that of Pharmaceutical Industry i.e. 24.13%.

*State Bank of Pakistan

** Karachi Stock Exchange

*** Annual Report 2010

DUO PONT IDENTITY:
YEARS		TOTAL ASSET TURNOVER	=	SALES	/	TOTAL ASSETS
				(Rs. Bn)		(Rs. Bn)
2009		1.34	=	14.7	/	11.007
2008		1.26	=	13.4	/	10.625
2007		1.04	=	10.61	/	10.164
2006		1.07	=	10.08	/	9.443
YEARS		PROFIT MARGIN	=	NET INCOME	/	SALES
				(Rs. Bn)		(Rs. Bn)
2009		6.3%	=	0.933	/	14.7
2008		14.5%	=	1.943	/	13.4
2007		15.7%	=	1.67	/	10.61
2006		16.5%	=	1.664	/	10.08
YEARS		RETURN ON ASSETS	=	PROFIT MARGIN	*	TOTAL ASSET TURNOVER
2009		8%	=	6.3%	*	1.34
2008		18%	=	14.5%	*	1.26
2007		16%	=	15.7%	*	1.04
2006		18%	=	16.5%	*	1.07
			=
YEARS		EQUITY MULTIPLIER	=	TOTAL ASSETS	/	TOTAL EQUITY
				(Rs. Bn)		(Rs. Bn)
2009		1.36	=	11.007	/	8.104
2008		1.27	=	10.625	/	8.354
2007		1.25	=	10.164	/	8.157
2006		1.25	=	9.443	/	7.536
YEARS		RETURN ON EQUITY	=	RETURN ON ASSETS	*	EQUITY MULTIPLIER
2009		11.5%	=	8%	*	1.36
2008		23.3%	=	18%	*	1.27
2007		20.5%	=	16%	*	1.25
2006		22.1%	=	18%	*	1.25

Cost Analysis:

COST ANALYSIS	YEARS
	2010	2009
Purchases	11,432,023	11,362,354
Purchases as % total CGS	97.11%	96.93%
Conversion cost	0.68%	1.09%
Sunk Cost	2.21%	1.98%
TOTAL	100%	100%

The details of the above cost analysis are given below which are taken from the Annual Report Year 2010.

COST OF SALES:	2010	2009
Raw and packing materials consumed	8,931,872	8,262,577
Manufacturing charges to third party	201,508	146,038
Stores and spares consumed	41,658	36,670
Salaries, wages and other benefits – note	1,032,729	970,490
Fuel and power	367,376	287,673
Rent, rates and taxes	2,702	5,204
Royalty and technical fee	154,028	157,754
Insurance	66,865	50,559
Repairs and maintenance	125,375	116,333
Training expenses	3,038	127
Travelling and entertainment	11,154	9,174
Vehicle running	14,524	14,749
Depreciation / amortisation	254,859	208,963
Impairment charge	18,309	58,050
Provision for slow moving and obsolete stock - raw	91,794	84,874
Provision for slow moving and obsolete	2,426	80
Canteen expenses	77,077	72,629
Laboratory expenses	33,686	32,484
Communication and stationery	10,673	9,254
Security expenses	12,532	9,032
Stock written off	30,803	4,352
Other expenses	32,904	30,355
	11,517,892	10,567,421
Opening stock of work-in-process	301,944	201,425
Closing stock of work-in-process	(394,146)	(301,944)
Cost of goods manufactured	11,425,690	10,466,902
Opening stock of finished goods	1,580,625	685,183
	13,006,315	11,152,085
Closing stock of finished goods	(1,615,963)	(1,580,625)
Cost of samples shown under selling, marketing	(104,696)	(78,356)
	11,285,656	9,493,104
Trading goods
Opening stock of finished goods	1,066,566	974,383
Purchase of finished goods	2,500,151	3,099,777
	3,566,717	4,074,160
Closing stock of finished goods	(993,185)	(1,066,566)
Provision for slow moving, obsolete and damaged	217,844	55,901
Cost of samples shown under selling, marketing	(13,790)	(42,007)
	2,777,586	3,021,488
	14,063,242	12,514,592

SALES UTILIZATION:

Following is the analysis of how sales is been utilized in the business process and its analysis is been done.

	2010
TOTAL INCOME	19.313	100%
TOTAL COST&EXP*	(18.26)	94.52%
PROFIT	1.058	5.48%

*COST UTILIZATION:
COGS	77%
Sellng Exp	13%
ADMIN	5%
Operatng Exp	1%
Financial Chrges	0%
Taxation	5%
TOTAL COST	100%

Break Even Point Evaluation:

	BASE YR	75%	76%	78%	79%	79.93%	80%
Net sales	18.92	18.916	18.92	18.92	18.92	18.92	18.92
Cost of goods sold	(14.06)	14.2	14.4	14.8	14.9	15.1	15.1
Gross profit	4.85	4.729	4.54	4.16	3.97	3.80	3.78
Selng,Mktg,Dstbn Exp	(2.30)	(2.30)	(2.30)	(2.30)	(2.30)	(2.30)	(2.30)
Administrative Exp	(0.83)	(0.83)	(0.83)	(0.83)	(0.83)	(0.83)	(0.83)
Other operating Exp	(0.17)	(0.17)	(0.17)	(0.17)	(0.17)	(0.17)	(0.17)
Other operating Inc	0.40	0.40	0.40	0.40	0.40	0.40	0.40
Operating profit	1.95	1.83	1.64	1.26	1.07	0.90	0.88
Financial charges	(0.02)	(0.02)	(0.02)	(0.02)	(0.02)	(0.02)	(0.02)
Profit before taxation	1.93	1.81	1.62	1.24	1.05	0.88	0.86
Taxation	(0.87)	(0.87)	(0.87)	(0.87)	(0.87)	(0.87)	(0.87)
Profit after taxation	1.06	0.93	0.74	0.37	0.18	0.00	(0.01)

Multivariate Model:

In this model, different variables are being put at different values to evaluate the financial end results. It is to check the results if this happens then what would be the consequences.

Sales Growth:

Here it is considered that sales has a growth of 10% which would give an increase of 5% each to Selling, Marketing expenses and Administration expenses respectively, where the next colum would depict the picture if sales decreased by 10%. The consequence would be following:

	(+10%)			(-10%)
Net sales	20.81			17.02
Cost of goods sold	(14.06)			(14.06)
Gross profit	6.74			2.96
Selng,Mktg,Dstbn Exp	(2.53)			(2.07)
Administrative Exp	(0.91)			(0.74)
Other operating Exp	(0.17)			(0.17)
Other operating Inc	0.40			0.40
Operating profit	3.53			0.37
Financial charges	(0.02)			(0.02)
Profit before taxation	3.51			0.35
Taxation	(0.87)			(0.87)
Profit after taxation	2.64			(0.52)

First column shows the results of 10% increase in both Selling, Distribution expenses and Net Sales which ends in the profit of Rs. 2.64Billion. While despite of decrease in admininstration and selling expenditure by 5% where Operating expenses remains constant, company still would face certain loss of Rs. 0.52 Billion.

It is more likely to be a scenario manager which shows the picture with different variable that depicts three possible outcome; Good, Bad & Worst.

In Good condition; Sales is increased by 4% where all cost and expenses has an increase of 2%.

In Bad Condition; Sales has an increase of 2% with all expenses of 4% raise in them.

In Worst Condition; Sales remain constant whilst all expenditure raised by 6%.

	BASE		GOOD		BAD		WORST
Net sales	18.92		19.67		19.29		18.92
Cost of goods sold	(14.06)		(14.34)		(14.63)		(14.91)
Gross profit	4.85		5.33		4.67		4.01
Selng,Mktg,Dstbn Exp	(2.30)		(2.35)		(2.39)		(2.44)
Administrative Exp	(0.83)		(0.84)		(0.86)		(0.88)
Other operating Exp	(0.17)		(0.17)		(0.18)		(0.18)
Other operating Inc	0.40		0.41		0.40		0.40
Operating profit	1.95		2.38		1.64		0.91
Financial charges	(0.02)		(0.02)		(0.02)		(0.02)
Profit before taxation	1.93		2.36		1.62		0.89
Taxation	(0.87)		(0.87)		(0.87)		(0.87)
Profit after taxation	1.06		1.48		0.75		0.02

Growth Evaluation:

Internal Growth Rate:

It is the maximum growth rate without having any external financing. It depicts such growth that is acquired by company itself using its assets and without relying on more equity from share holders. This is more likely to be how much a company can grow with its assets utilization only.

Formulae:

IGR = Return on Assets * (1 – Dividend Payout ratio)

Sustainable Growth Rate:

It measures the maximum growth rate using both internal and external sources of financing but without increasing its financial leverages. It depicts that how much company is experiencing its growth by relying on its Equity of Shareholders, by utilizing the equity, to which extend company can grow.

Formulae:

SGR = Return on Equity * (1 – Dividend Payout ratio)

Following table shows the growth rate of GlaxoSmithKline year-wise from 2004-2010.

Years	SUSTAINABLE GROWTH	INTERNAL GROWTH
2004	12.9%	10.4%
2005	10.7%	8.7%
2006	4.0%	1.8%
2007	0.6%	0.5%
2008	4.0%	3.1%
2009	1.0%	0.8%
2010	-0.8%	-0.6%
AVERAGE	4.6%	3.5%

HORIZONTAL ANALYSIS ( BALANCE SHEET)

Companies cas has a fluctuating trend as it is initially increased on the basis of base year but tend to decrease in last three years where trade debt increased by almost 2000% in year 2008 where cash suddenly decreased by 50% in the same year. it might be said that company receivable policy isnt strong, they couldnt collect cash from debtors which is impacting. In the recent year trade debt decreased to 829% from 2981% where investment rose from 41% to 235% and fixed assets almost doubled by Rs. 4.18Billion.

In the analyzing the common size analysis, overall industry grew by 14% in respect of total assets while GSK increased by 217% which has contributed alot in expanding their Sales to Rs. 18billion. Non Current Assets are almost parallel with 251% and 276%. Same is with Current Assets but GSK increase is 194% while industry stands on 119%.

If it is about liabilities, a significant difference is noticed, Non Current Liabilities are much less than industry i.e. almost half. Same goes with Current Liabilities, GSK trade payables are much higher than industry where either they are financing through payables or their policy is weak. But the Company’s current assets are perhaps financed by its Equity.

VERTICAL ANALYSIS:

Most of the Sales is spent on cost which is thrown by 74% and as it has gradually increased from 60%. GSK succeeded in acheiving the highest sales of Rs. 18Bn in 2010 where overall industry average is only Rs. 6billion.

High cost of sales is a contemplating factor as most of it is spent on imports where in Pakistan only packaging is done. Operating profit is 4% higher of industry that surely depicts that Selling and Admininstrative expenses of GSk are higher which merely means that they are over throwing on it. But still it could be an excuse to have highest Sales in the entire Industry.

Profit before Tax is 10% of GSk which implies that 90% of sales is being utilized to gani this 10% which normally is out of track while 5% more is of Taxation which would result in Profit after Tax 5%.

Best way to analyze performance is to compare with competitors and environmental. Abbott is an immediate competitor in pharmaceutical industry.

-          Gross Profit of Abbott is much higher as of double from GSK that would mean Abbott is efficient in analyzing cost and maintaining its incremental profits but as a whole industry is equal to GSK few digits higher.

-          Operating Profit is also higher of GSK competitor that implies they controlled their expenses but didnt let it go fast out of track. Comparing both profits GSK expenses are of 6% but Abbott has 19% while industry spent 17% on expenditure of Administration and Sales Marketing.

-          Profit Before Taxation, this particular lies between Operating profit and PBT is finance cost. Abbott is 14% ahead from GSK in this particular but it goes parallel to operating profit that means both companies have negligable finance cost but industry spends 1% on this particular. Till now Abbott’s operational performance is better than GSK.

-          Proft After Taxation, yet another component where Abbott performance is appreciate able from overall industry. There is a slight diferrence of Tax reduction between them, Look like tax rates vary as industry has PAT of 7% but GSK has 6%. The profit of GSK deteriorated from Rs. 1.47billion to Rs. 1.06billion with a fluctuating trend followed by.

HORIZONTAL ANALYSIS:

 On the basis of horizontal analysis, performance of GSK in terms of sales is much efficient than any competitor. Increase of Rs. 1bn average is noticed every year, round about their sales growth is 5% to 10% average. Same goes with cost of sales, it rose by Rs. 3bn average every year.

-          Every Profit particular decreased gradually in last seven years where GP increased in recent year. It doesnt increased by reducing cost but increasing sales volume. Their tremendous sales is covering or caping their profits otherwise they would have gone into red long before. They nearly double their fixed assets which cause the sale increase but devaluation of Rupee parity eroded Profits.

-          Putting 2005 a base year, none of the company had such high sales, overall industry increased by 121% from 2005 but GSK made double of it. Astongishly Abbott sales is decreasing every year and has reduced to 48%.

-          Gross profit of GSK is also highest and rose to 126% during last seven years where industry has increased of 95%. In this particular  Abbott has a fluctuating trend, not a steady but reduced in recent years.

-          Operating profit and PBT are of same values and gone parallel but decrease reckoned of both companies. Overall finance cost has risen by 70% but it is lower if compared with first year.

-          PAT has a fluctuating in it by overall it is reducing, the only increase it saw was in 2008 otherwise GSK isnt performing well in maintaining it PAT where Abbott some how has good performance than industry and GSK.

Current Ratio:

Recently current ratio has reached the lowest point of 2.7 in previous six years. Although a high current ratio doesnt depict a good performance vice versa of lowest value.

There are few aspects of following current ration:

-          Account payable has increased significantly by 26%

-          Where current ratio decreased by only 20%

-          Account receivable has a reduction of 70%

-          But Stock in trade noticed a increase of 5.8%

Current ratio is lowest because there isnt any significant increase in current assets. Cash and account receivable both have reduced by. Highest current ratio was in 2006 because of one particular i.e investment that grew by Rs. 7billion. Cash was also at its peak value of Rs. 4.6billion.

The best way to analyze performance is comparison with own competitors. GSK has managed to achieve its current ratio as a leading corportaion in it while rest of competitors like Abbott and Wyeth are on 2.03 and 2.07 respectively. As it is earlier mentioned that high current ratio doesnt depict a good performance which means in further elaboration that company may reinvestment ratio is low its collection of receivable isnt good in some manner or they have weak economic order quantity.

Another way to analyze our self is comparing with overall industry, the average calculation of industry average is reckoned as 2.16 whilst GSK has attained its current ratio of 2.7  in year 2010 which is a good indication of performance.                                      CURRENT RATIO GRAPH (GLAXO VS INDUSTRY)

Acid Test Ratio:

It implies the liquidity and short term debt paying ability more specifically. Inventory  is deducted  from current assets to find out to which extent company is able to cover its liabilities without the help of selling its inventory.

Quick ratio for the recent year 2010 is also lowest in its trend as it is 1.5. Current ratio and Acid test ratio is moving in a same pattern which means there isnt any increase or decrease in inventory for last six years significantly. The trend is fluctuating and it was height of 7.55 in fiscal year 2006 because of investments that is risen to Rs. 8billion.

In comparing with an immediate competitor Abbott, it has attained a good Acid test ratio as it is 1.5 while Abbott is standing on 0.97. It shows a strong performance of Glaxosmith Kline that its reliability on inventory is relatively low and is independent can achieve its goal. This ratio analysis shows that GSK has higher inventory ratio than industry in its current assets.                                             Glaxo vs Industry – Acid test ratio

Cash Ratio:

Cash ratio is more specific in depicting short term debt paying ability where it indicates how well corporation is in cash generation and to which extent company can pay its debt by its cash.

In case of GSK, there is a declination in cash ratio since 2004 and noticeable downward trend indicates either their reinvestment ratio is good or they are paying dividend heavily.

Now we will look at dividend payout ratio as it has gone to 91%, an astonishing figure.

It is already seen that company is throwing most of its cash to its dividend. Their dividend payout ratio reached upto 97% in 2007 which means GSK isnt retaining any cash for unseen able situations.

Now there are two possible situation for that high dividend ratio:

-          Either to attract more shareholders for investment

-          Or compulsion of major shareholder for low retention ratio.

Dividend is increasing significantly and it has reached to 90%, so most of its cash is used in paying dividend. Company may face some problems in paying its bills for unfortunate circumstances.

There may be a reason of cash that they are trying to maintain or reduce their payable payment period that may be giving advantage to suppliers.

No we will GSK cash ratio with immediate competitor. None of the competitor has payout ratio more than 50% only GSK has 90%. Even Wyeth isnt giving any dividend this year and their retention ratio is high while Sanofi and Searlpak has ratio of 35% and 15% respectively.

The industry average of paying dividend is 50% while GSK is heading by 91% which isnt a good indication, it may create some problems for company in coming years when they will face shortfall of liquidity.

 Working Capital:

It implies what assets are left after paying all the current liabilities with current assets. If there is an immediate need of payment, then current assets are able to pay off and what liquid do we left with after paying off.

There is an upward trend in current assets of Glaxosmith that makes a working capital graph ongoing basis and it supports the company to increase its working capital. Despite of increase in current assets, current liabilities made an aggressive stand and it increased by 300% where historical increase in current assets is 194%.

It looks more like company is financing or at least supporting its finance by its trade payables. It had a significant increase of 359% which depicts that company isnt paying off to their suppliers as they should do.

In comparison with industry, Glaxosmith is less than 50% in every year and industry working capital is heading with almost half of it. It implies that GSK isnt retaining its cash or current assets like the competitors doing.

So the overall liquidity of the company is good and its performance is doing well, in relation with others the efficiency of company is appreciate able as it is heading in every aspect other than working capital. It would be rightly said that overall industry is declining and its ratios are deteriorating every year.

GROSS PROFIT MARGIN:

It is the difference between revenue and cost. The purpose of this margin is to determine the value of incremental sales and guide pricing and promotion decision.

Gross profit margin is deteriorating and there is a downward trend in it since 2005. It has been decreasing and reached at its lowest figure by 24%in fiscal year 2009 while company maintained to increase it by only 1% in the recent year of 2010. The major contribution in this margin reduction is raw material consumption as it has increased by almost 75% in comparison with previous year. Although it is a significant increase but is directly related to sales, as sales has reached the highest among previous year. Cost of sales has also increased by Rs. 3billion approx. Most of the raw material is importing from abroad and it creates a deep impact on it by devaluation of Pakistan Rupee, the more devaluation of rupee in foreign market, the more cost will be.

In comparison with competitors, Abbott has 29% and highest achievement is of SearlPak while Glaxosmith is on 4^th number even though its achievement of sales is more than all competitors in the industry. So Glaxosmith has to reduce its operational expenses otherwise cutting of profit could also be another option.

The trend of industry can be seen in the table attached in Annexure.

Industry is heading from last couple of year by 2% where it was behind the Glaxosmith in last five year. it has always higher gross profit margin than industry. The overall industry gross profit is decreasing follwoing with every year, started from 37% it has reduced by 10% to the recent year.

Net Profit Margin:

The profit margin tells you how much profit a company makes for every Rs.1 it generates in revenue or sales. Profit margins vary by industry, but all else being equal, the higher a company’s profit margin compared to its competitors, the better.

A high profit margin indicates more profitable company that has better control over cost compared to its competitors.

Likewise gross margin, profit margin has also reached to its lowest value and there is also downward trend in it. Profit margin decreased from 16% to 5% in last six years.

Net profit which is low shows less efficient operating activities. A significant increase of taxation that is 40% and reduction of operating income has contributed in deterioration in net profit while main defaulter is forwarded from low gross margin.

In achieving valuable profit margin, GSK has failed where Abbott is the leader of cost control by attaining 10% which is followed by SearlPak by having profit margin of 7%. So Glaxosmith isnt performing good where competitors are good in cost control. It is basically due to increase in Selling and distribution expenses which have increased by inflation. Selling expenses increased by 26%.

Relation of Net profit and Gross Profit:

The most important thing in this relation is the difference of gross margin and profit margin, it has wide difference, it might be a point to ponder. High difference would mean that company operating cost are more than what it should. Between Gross profit and net profit, operating profit lies that would mean if company operational activities are higher than it will impact the net profit.

Somewhere its a good indication of performance if the difference is low, in case of GSK it has been reducing continuously as it is depicting that although profit margin is eroding in every year but company is putting all its effort to reduce the operating expenses and have succeeded in doing it. Operating expenses reckoned is almost 1% that is ignorable as this expense is in relation with sale.

Even though such reduction of profit margin in last decade, management reduced the difference and succeeded in decreasing it by 5% during previous five years. Earlier it was 23% but by efforts of management, it has reached to only 18%. It’s an appreciatable effort because controlling the cost in such circumstances.

Posted in: GLAXOSMITH KLINE (FINANCIAL ANALYSIS)