netrashetty
Netra Shetty
GlaxoSmithKline plc (LSE: GSK NYSE: GSK), often abbreviated to GSK, is a global pharmaceutical, biologics, vaccines and consumer healthcare company headquartered in London, United Kingdom. It is the world's third largest pharmaceutical company measured by revenues (after Johnson & Johnson and Pfizer).[3] It has a portfolio of products for major disease areas including asthma, cancer, virus control, infections, mental health, diabetes and digestive conditions.[4] It also has a large consumer healthcare division which produces and markets oral healthcare products, nutritional drinks and over-the-counter medicines, including Sensodyne, Horlicks and Gaviscon.[4]
Its primary listing is on the London Stock Exchange and it is a constituent of the FTSE 100 Index. It has a secondary listing on the New York Stock Exchange.
Business Growth
In Q3 of 2010, GSK reported sales of £6.8 billion, a decline of 2% over the same quarter of 2009. Sales decline was driven by lower pharmaceutical sales (-3%) even though consumer healthcare grew by 4% to £1.2 billion. As in Q2, several factors including: acceleration of losses to generic competition (Valtrex), discontinuation of promotion of Boniva, lower Avandia sales, contributed to lowering of US sales. This was in spite impressive growth in sales for Vaccines (+32% to £278 million), and Oncology (+34% to £89 million).[1]
In Q2 of 2010, GSK reported sales of £7.0 billion, a growth of 4% over the same quarter of 2009. Sales growth was driven by strong sales increases in emerging markets (17%), Asia/Pacific (9%) which offset the decline in the US sales (-13%). The US sales decline was credited to several factors including: acceleration of losses to generic competition (Valtrex), discontinuation of promotion of Boniva, lower Avandia sales, temporary suspension of Rotarix from the market and some volatility in other vaccine shipments. The operating profit reduced by 98% from £2.195 billion in Q2 2009 to only £51 million for Q2 of 2010 mainly due to legal costs of £1.57 billion (Q2 2009: £85 million).[2]
In Q1 of 2010, GSK reported sales of £7.4 billion, a growth of 13% over the same quarter of 2009. Sales growth was driven by strong sales increases in emerging markets (43%), Asia/Pacific (45%), and new products (65%). Sales also received a boost from H1N1 pandemic vaccine sales of £1.1 billion. GSK also reported a post-tax net income of £1.6 billion, representing an 18% growth for the quarter.[3] GSK's earnings beat analyst estimates by almost $200 million for the quarter.[4]
In Q4 2009, GSK reported sales of £8.09 billion, a growth of 17% over the same quarter of 2008. Earnings rose 33% to 35.4 pence per share. GSK's growth for the quarter was largely driven by increased sales in its healthcare division and emerging markets. Profits also got a boost from sales of the H1N1 vaccine and an HIV partnership with Pfizer.[5] GSKs earning for the quarter beat analyst expectations.Despite the higher-than-expected earnings for the quarter, GSK announced job cuts and research cuts, including large cuts in its antidepressant research. This comes in the face of tightening conditions for the industry as a whole as patent expirations threaten drug prices.[6]
In Q3 2009, GSK reported sales of £6.76 billion, a growth of 3% from the same quarter of 2008. Major drivers behind the growth included boosted sales of flu vaccine, Relenza, as well as expansion into emerging markets and Japan and expansion of GSK's consumer health business. Growth was hindered, on the other hand, by decreased sales in the U.S. due to increased generic competition.[7] GSK's pretax profit reached £2.07 billion, which slightly missed analyst targets for the quarter.[8]
Recent News
Avandia
On July 13th 2010 it was reported that GSK has agreed to pay about $460 million to settle a majority of lawsuits that alleged that use of Avandia caused heart attacks and strokes. This announcement is not confirmed by GSK's spokesperson but was reported by Bloomberg News. This report came as GSK defended Avandia's safety during a two-day meeting with the FDA. [9]
The outside expert committee has recommended that Avandia should be kept on the market but with additional warnings. 20 of the 33 member committee voted to keep the drug on the market. They agreed that the data raised concerns about heart attacks associated with the pill but not enough to warrant its complete withdrawal from the market. The FDA will rule on this in the upcoming months. The FDA in general follows the advice of it's advisory's committee.[10]
On Sep 23,2010, the FDA and drug regulators in Europe announced Avandia would no longer be widely available. The drug’s sales will be suspended entirely in Europe, while patients in the United States will be allowed access to the medicine only if the patients and their doctors attest that they have tried every other diabetes medicine and that patients have been made aware of the drug’s substantial risks to the heart. Patients now taking Avandia may continue to do so.[11]
On Oct 22,2010, GSK announced Avandia is under investigation by federal and state law enforcement officials in the U.S. The company received a subpoena from Department of Justice, which is investigating the development and marketing of Avandia. The company received similar requests for information from attorneys general in several states.[12]
Whistle Blower Lawsuit
On Oct 27,2010, the company announced it has agreed to pay $750 million to settle criminal and civil complaints that the company for years knowingly sold contaminated baby ointment and an ineffective antidepressant. Altogether, GSK sold 20 drugs with questionable safety that were made at a plant in Puerto Rico that for years was rife with contamination.
Whistleblower Cheryl Eckard, the company’s former quality manager, asserted in her suit that she had warned the company of the problems but GSK fired her instead of addressing them. The share to the whistle-blower will be $96 million, one of the highest such awards in a health care fraud case. The criminal fine would $150 million, the highest ever for a manufacturer of adulterated products; $600 million were provided for civil penalties. There is a rising trend of whistle blower lawsuits as big pharma reduces its headcount to counter-act lower sales and lack of new blockbuster approvals.[13]
Business Segments
GlaxoSmithKline has three different product areas: prescription medication, consumer health, and vaccines. While each of these units is sizable, GlaxoSmithKline is especially dominant in the vaccine market, supplying roughly one quarter of all vaccines worldwide. Some of its best known consumer products include Tums (antacids) and Aquafresh (toothpaste). GlaxoSmithKline's prescription products include medications to treat cancer, asthma, malaria, and depression among other maladies.
Products and Revenue
Pharmaceutical (GBP 27.3 Billion)
The bulk of GlaxoSmithKline’s revenues -- 83% in 2009 -- comes from the sale of prescription medications. GlaxoSmithKline has medications in many different therapeutic categories, including cardiovascular, respiratory, and central nervous system. Some of its most important prescription products include:
Seretide/Advair (GBP 5 Billion): This product is a long-acting bronchodilator, meaning it opens up the patients' air passages, and an anti-inflammatory taken through an inhaler. Seretide/Advair is approved to treat asthma and Chronic Obstructive Pulmonary Disease (COPD). In 2004, it was estimated that roughly 20 million Americans (between 5 and 10%) have asthma; there is clearly a very large market for treatments. While there are no indications that the number of cases of asthma is growing, there has been no marked decrease either. Further, it is possible that in developing countries with laxer safety conditions in the workplace, more cases of occupational asthma could develop, providing new markets for this medication.
In a new study by the FDA, however, Seretide/Advair was linked to an increase in serious long-term asthma-related side effects. Similar drugs of the same class from other major drug manufacturers were also implicated, making any regulatory action likely unilateral. [14]
Avandia (GBP 771 million): Avandia is a metabolic product for the treatment of diabetes. It is used to level insulin levels and is very effective in mitigating type 2 diabetes. Despite its high sales, however, Avandia has recently faced some challenges in the United States. An advisory committee of the Food and Drug Administration (FDA) in July 2007 found that Avandia carries potential cardiovascular risks. While the FDA has not decided to remove the drug from the market, in November of 2007 Avandia received a black box warning, the severest possible. Sales in 2009 fell by 16 percent. A major study assessing the risk of the drug will not be complete until 2014. The FDA is holding a Joint Meeting of the Endocrinologic and Metabolic Drugs Advisory Committee and the Drug Safety and Risk Management Advisory Committee Meeting to evaluate the safety of Avandia on July 13-14 2010.[15] On Sep 23,2010, the FDA and drug regulators in Europe announced Avandia would no longer be widely available. The drug’s sales will be suspended entirely in Europe, while its distribution in the US would be severely restricted.[11]
Anti-Virals (GBP 4.2 billion): GSK's anti-virals franchise, which includes genital herpes treatment Valtrex, HIV treatment Epzicom, and influenza treatment Relenza. Total anti-viral sales grew 12% in 2009. GSK is also seeing greatly increased sales of its flu treatment, Relenza, in the wake of the global Influenza outbreak of 2009. It is just one of two drugs approved for treatment to reduce the effects of the swine flu virus, the other being Roche Pharmaceuticals (RHHBY)'s Tamiflu. Governments are stockpiling both in the event the disease becomes resistant to one of the drugs. [16]
Vaccines (GBP 3.7 Billion)
As mentioned above, GlaxoSmithKline currently produces nearly a quarter of vaccines sold worldwide. Its vaccines are used to treat a wide range of ailments including hepatitis, meningitis, influenza and various childhood diseases. Specific products include Havrix for hepatitis A, Engerix-B for hepatitis B, and the group Mencevax for meningitis.
Although demand for vaccines has remained generally constant, there are several situations that could cause fluctuations. If the birth rate were to suddenly increase, more children would need vaccines against childhood diseases such as measles, mumps, and chicken pox. Additionally, an influenza outbreak would vastly increase demand for flu vaccines. There has not been a major outbreak in several decades, and the Center for Disease Control (CDC) expects that an outbreak could occur in the coming decades.
A recent European study has shown GlaxoSmithKline's Rotarix, a new rotavirus vaccine, to be highly effective. Rotavirus causes severe diarrhoea in young children. Compared to the control group, children given Rotarix were 90% less likely to develop symptoms. Rotarix will be in direct competition with Merck's Rotateq, which is also in late clinical trials.
On October 6, 2009, GSK announced that it had received orders for 149 million additional doses from governments around the world for its Pandemrix™ H1N1 vaccine, bringing its total orders up to 440 million, worth approximately $3.5 billion.[17][18] Analysts estimate H1N1 vaccine sales to reach $1.44 billion in Q4.[19] However, as the 4th quarter closes for vaccine-makers such as GSK, reports show that H1N1 sales have fallen well below analyst estimates. Analysts now predict pandemic vaccine sales for GSK to reach about £835 million, or about half of the earlier estimates.[20]
Consumer Health Care (GBP 4.7 Billion)
GlaxoSmithKline's consumer health care products include over-the-counter medications, nutritional supplements, and oral care products. Some of the major products include Aquafresh, a well-known toothpaste brand, Sensodyne, a toothpaste specifically for sensitive teeth, Tums and Citrucel for gastro-intestinal ailments, and Nicorette products to help users quit smoking.
Research and Development
The development process for new drugs is a risky and expensive business. In 2009, GlaxoSmithKline spent GBP 4.11 Billion on research into new treatments and products, nearly 6.9% of its total sales. The process from concept to market takes anywhere from 10 to 15 years. Most medications do not make it past the clinical trials phase of development. For every success there are multiple failures. The final product, once formulated, is protected under patent for generally less than 10 years after release. GlaxoSmithKline has one of the broadest pipelines, or group of potential products, in the industry. By the end of 2009, there were 30 products in Phase III (late stage) development. While many of these drugs will ultimately fail, the possibility of even one being a blockbuster(annual sales of over $2B) can help the company achieve sales targets for the next 5 years.[21]
Andrew Witty, the CEO of GSK, upon his promotion in 2007 changed the way the company conducted research and development. He eliminated "me-too" drug research and shut down research in areas of depression, anxiety, pain and other mature categories, concentrating focus on emerging markets. He divided the early-stage research into 40 autonomous biotech-style research teams, with between 7 and 70 scientists each. Each unit leader is like the head of a little biotech company and got to set a three-year budget and freedom to invest it as he/she saw fit. This practice is innovative and has let to interesting collaborations and leads but no products have emerged as yet.[22]
Trends and Forces
Tightening FDA Regulations
When FDA commissioner Margaret Hamburg began her tenure in 2009, she announced that the FDA would toughen it's enforcement efforts to protect public health.[23] As the FDA has drawn criticisms for its failures in preventing deaths caused by drugs such as Vioxx, Hamburg has come in with several fixes that include stricter monitoring of drug adverse events, more funding for the agency, stronger ability to force product recalls, and more scientific expertise within the agency.[24] On May 19, 2010, the FDA announced 21 proposals aimed at increasing transparency to the public regarding regulatory information.[25]
Such information will increase the amount of information accessible to the public with regard to companies' pipeline drugs and manufacturing facilities that might otherwise not have been disclosed. While the tightened regulations and increased transparency will eventually improve the overall quality of pharmaceutical products, there will be growing pains as companies adjust to the stricter standards and stronger enforcement. GSK's ability to adjust to these new standards will impact its valuation and financial success.
GSK plans growth in emerging markets
In December 2009, GSK announced a three-pronged plan strategy to expand its presence in emerging markets. The plan includes scaling up its branded generics business, obtaining more government contracts for its vaccine business, and pushing more of its patented medications in developing countries. The emerging market, which includes rising middle classes in Asia, Latin America, the Mid-East and Africa, is already estimated at $81 billion and is growing fast enough to double by 2020.[26] GSK has already looked at expanding its branded generic's business, acquiring such businesses from Eli Lilly and UCB Pharma, and is striking deals with established emerging market generic companies such as India's Dr. Reddy's Labs and Africa's Aspen Pharmacare.GSK faces strongest competition in this area from Pfizer, Novartis, and Sanofi Aventis[27] GSK's ability to capitalize on emerging markets will have a significant impact on its growth during the coming decade.
Patent expirations
Proportion of GSK's revenue that is earned from drugs whose patents will expire or have expired during the time-frame on the x-axis.[28]
For a detailed discussion of brand name vs. generic medication, see also Generic drugs.
Patent exclusivity is essential within the pharmaceutical industry, where the market exclusivity granted by patents enables companies to enjoy a period of high profitability necessary to justify the high costs of development for a novel therapeutic. Moreover, in the pharmaceutical industry, a single patent covering the active ingredient of the drug can oftentimes represent the entire unique value of that product.[29]
The United States, European Union, Japan, and most developed nations in the world offer an accelerated generic drug approval process whereby competitors can develop generic versions of brand name drugs with expired patents. The accelerated approvals, known as ANDAs in the US, only require that the sponsor company show that their drug is equivalent to the name-brand drug, enabling that company to bypass the expensive and time consuming clinical trials required of a novel drug.[30] The relatively cheap cost to develop generics in comparison to name-brand drugs enables generic companies to substantially undercut prices, to the tune of $10 billion total, annually across the industry.[31]
GSK lost patent exclusivity to several major drugs from 2006 to 2008, including Wellbutrin XL, Lemactil, Zofran, and Coreg. GSK's major genital herpes therapy Valtrex, which brought in €1.2 billion in 2008, is set to lose patent exclusivity at the end of 2009, and their blockbuster asthma therapy Advair, which earned over €4.1 in 2008, will lose exclusivity in 2010. By 2011, 43% of GSK's 2008 revenue will be represented by drugs that will face generic competition. However, it is important to note that GSK already earns almost €5 billion from drugs with expired patents. Moreover, GSK spends 15.1% of sales on R&D and will look to compensate for these anticipated losses through the development of novel therapies.[32]
Politics and Insurance
Like other global pharmaceutical companies, GlaxoSmithKline faces constant pressure from governments and activist organizations to increase access to medications by either lowering prices substantially or removing patent restrictions so generics can be manufactured.
Medicare and Medicaid policies have an important impact on GlaxoSmithKline's sales. Medicare is the federal government's health subsidy plan while Medicaid generally falls to the states. Policies allow the government to bargain for lower prices; essentially the government caps prices for a large number of plans. This lowers revenues while increasing the amount of medications sold. Additionally, the government often requires rebates be paid at the end of the year.
Over the past several years, many states and the federal government have begun suing multiple pharmaceutical companies because of alleged price fraud. The states are suing based on alleged defrauding of the state health care assistance program, Medicaid. If the states win, the pharmaceutical companies will be forced to pay hundreds of millions of dollars and change pricing schemes. While the first trial in these cases will not be finished for at least another year, this litigation could greatly affect GlaxoSmithKline. Additionally, changes in Medicare and Medicaid legislation could cut into revenues even more in the future, especially if nationalized or cheaper health care advocates come into office.
There are currently no well publicized cases against GlaxoSmithKline other than these pricing cases, but just under a year ago the company settled for $63.8 million on claims that it promoted its antidepressant drug Paxil for use by children while withholding information about the medication's safety. The suit was a class action, and highlights the constant threat of litigation and the care that must be taken in marketing pharmaceutical products.
Flu Pandemics/Epidemics
There is always a threat of a regional or even global outbreak of a major influenza virus. For example, the Spanish influenza pandemic of 1918 infected 500 million people and killed 10% of victims.[33] More recently, the Avian flu of the early 2000s killed at least 200 people around the world, particularly in Southeast Asia.[34] The Swine flu scare of April 2009 similarly has threatened countries all over the world, and the possibility that it could turn into a major flu pandemic is a serious concern. Public health officials all over the world have stocked up on vaccines and treatments in the event of such an outbreak. GlaxoSmith Kline's Relenza is one of two approved influenza treatments, along with Roche Pharmaceuticals (RHHBY)'s Tamiflu. A sustained period of calm can result in decreased demand for Relenza and hurt GSK's bottom line, but renewed fear of outbreak (such as the Swine flu scare) can be a significant boon to earnings. GSK increased production capacity of Relenza in 2009 to 190 million treatment courses in anticipation of such an event.
On September 25, 2009, the European Committee for Medicinal Products for Human Use (CHMP) recommended approval of GSK's H1N1 vaccine, Pandemrix™. This recommendation means that the vaccine will be immediately reviewed for approval to market for H1N1 prevention. GSK is currently conducting 16 clinical trials with 9000 patients to further evaluate the effectiveness of the vaccine against the H1N1 virus.[35] On October 6, 2009, GSK announced that it had received orders for 149 million additional doses from governments around the world for its Pandemrix™ H1N1 vaccine, bringing its total orders up to 440 million, worth approximately $3.5 billion.[36][37]
In January 2010, reports indicated that pandemic flu vaccine sales were below original estimates, as many countries found themselves with more doses than required to meet demand. Germany led the way in cutting orders, slashing the amount of H1N1 vaccines on order by 30%. The UK, France, Spain, Netherlands, and Belgium are discussing cuts as well.[38] Analysts now predict pandemic vaccine sales for GSK to reach about £835 million, or about half of the earlier estimates.[39]
Comparison to Competitors
The pharmaceutical market is a very competitive arena on several fronts. First is the generic competition and loss of patent, as discussed above. Other competition includes branded competition amongst drugs with similar indications .
Advair, one of GlaxoSmithKline's biggest drugs for asthma (see above) faces competition from AstraZeneca's 's Symbicort, which is expected to launch in 2007. Additionally, Avandia, the diabetes drug discussed above, will likely face competition from Merck (MRK)'s new oral diabetes drugs Januvia and Janumet. If the FDA decided to require warnings on Avandia concerning heart failure, Merck (MRK) could very easily take a large portion of the type 2 diabetes market share.
Successful competition requires diversification, size, investment in research (including a broad pipeline) and of course minimization of costs and high sales. GlaxoSmithKline is far ahead of the competition as far as new research. It has nearly double as many drugs in late stage development as its closest competitor, Pfizer (PFE). GSK, however, has significantly lower earnings than Pfizer despite having significantly similar sales. This is largely due to the company's higher operating costs and the costs associated with its recent acquisitions. GlaxoSmithKline's biggest competitors include Pfizer (PFE), Novartis AG (NVS), Merck (MRK), and Schering-Plough (SGP).
Competition in the pharmaceutical industry lies mostly in specific drug markets. For example, a new diabetes drug is not going to have any effect on an existing cholesterol drug, no matter how successful it is. As a result, financial data on the pharmaceutical companies do not tell the whole story. Instead, it may be more appropriate to analyze GSK's competitors by each drug market (See section on Major Drugs and Industry Trends).
The table below displays competitive operating metrics for competitors within the pharmaceutical industry. Note that the total revenue for Merck and Pfizer was influenced by revenue inherited from their acquisitions of Schering-Plough and Wyeth, respectively. In addition, net income for Merck was bolstered by $3.2 billion from the sale of its animal division [40], while Bristol-Meyers Squibb's net income saw a one-time $7.2 billion increase from the sale of its nutrition division.[41]
Pharmaceutical and Biotech Industry — Competitive Operating Metrics (2009)
Johnson & Johnson (JNJ)
Pfizer (PFE)
Novartis (NVS)
Abbott Laboratories (ABT)
Merck (MRK)
Bristol-Meyers Squibb (BMY)
Eli Lilly (LLY)
Amgen (AMGN)
Gilead (GILD)
AstraZeneca (AZN)
Roche (RHHBY)
Revenue (in billions of USD)
Total Revenue
$61.9
$50.0
$44.3
$30.8
$27.4
$18.8
$21.8
$14.6
$7.0
$32.8
$49.1
Gross Profit
$43.5
$41.1
$32.1
$17.6
$18.4
$13.7
$17.6
$12.6
$5.4
$27.2
$34.4
Revenue Growth from 2008
-2.9%
3.5%
4.0%
4.2%
15.0%
6.2%
7.2%
-2.4%
31.4%
3.8%
7.5%
Income
Net Income
$12.3
$8.6
$8.4
$5.8
$12.9
$10.6
$4.3
$4.6
$2.6
$7.5
$7.8
Net Profit Margin
19.8%
17.3%
19.0%
18.7%
47.0%
56.4%
19.8
31.5%
37.6%
22.9%
15.9%
Operating Income
$15.8
$10.8
$10.0
$6.2
$15.3
$5.6
$5.4
$5.5
$3.5
-$11.5
$11.9
Diluted EPS Growth from 2008
-3.7%
2.5%
3.7%
21.8%
55.6%
20.7%
NA
19.6%
36.9%
23.6%
-11.8%
Other
R&D Spending
$7.0
$7.8
$7.5
$2.7
$5.9
$5.1
$4.3
$2.9
$0.9
$4.4
$9.9
Latest Full Context Quarter Ending Date
2010/09
Gross Profit Margin
80.2%
EBIT Margin
23.1%
EBITDA Margin
25.7%
Pre-Tax Profit Margin
20.4%
Interest Coverage
8.2
Current Ratio
1.5
Quick Ratio
1.1
Leverage Ratio
4.3
Receivables Turnover
4.8
Inventory Turnover
1.4
Asset Turnover
0.7
Revenue to Assets
0.7
ROE from Total Operations
40.8%
Return on Invested Capital
16.2%
Return on Assets
9.4%
Debt/Common Equity Ratio
1.51
Price/Book Ratio (Price/Equity)
6.57
Book Value per Share
$5.96
Total Debt/ Equity
1.55
Long-Term Debt to Total Capital
0.60
SG&A as % of Revenue
39.2%
R&D as % of Revenue
15.3%
Receivables per Day Sales
$74.75
Days CGS in Inventory
261
Working Capital per Share
$3.37
Cash per Share
$3.78
Cash Flow per Share
$3.54
Free Cash Flow per Share
$1.41
Tangible Book Value per Share
$-1.24
Price/Cash Flow Ratio
11.1
Price/Free Cash Flow Ratio
27.7
Price/Tangible Book Ratio
-31.53
Most recent data
5-Year Averages
Return on Equity
57.6%
Return on Assets
15.7%
Return on Invested Capital
28.7%
Gross Profit Margin
81.0%
Pre-Tax Profit Margin
30.8%
Post-Tax Profit Margin
21.4%
Net Profit Margin (Total Operations)
21.4%
R&D as a % of Sales
14.6%
SG&A as a % of Sales
32.0%
Debt/Equity Ratio
1.01
Total Debt/Equity Ratio
1.21
Its primary listing is on the London Stock Exchange and it is a constituent of the FTSE 100 Index. It has a secondary listing on the New York Stock Exchange.
Business Growth
In Q3 of 2010, GSK reported sales of £6.8 billion, a decline of 2% over the same quarter of 2009. Sales decline was driven by lower pharmaceutical sales (-3%) even though consumer healthcare grew by 4% to £1.2 billion. As in Q2, several factors including: acceleration of losses to generic competition (Valtrex), discontinuation of promotion of Boniva, lower Avandia sales, contributed to lowering of US sales. This was in spite impressive growth in sales for Vaccines (+32% to £278 million), and Oncology (+34% to £89 million).[1]
In Q2 of 2010, GSK reported sales of £7.0 billion, a growth of 4% over the same quarter of 2009. Sales growth was driven by strong sales increases in emerging markets (17%), Asia/Pacific (9%) which offset the decline in the US sales (-13%). The US sales decline was credited to several factors including: acceleration of losses to generic competition (Valtrex), discontinuation of promotion of Boniva, lower Avandia sales, temporary suspension of Rotarix from the market and some volatility in other vaccine shipments. The operating profit reduced by 98% from £2.195 billion in Q2 2009 to only £51 million for Q2 of 2010 mainly due to legal costs of £1.57 billion (Q2 2009: £85 million).[2]
In Q1 of 2010, GSK reported sales of £7.4 billion, a growth of 13% over the same quarter of 2009. Sales growth was driven by strong sales increases in emerging markets (43%), Asia/Pacific (45%), and new products (65%). Sales also received a boost from H1N1 pandemic vaccine sales of £1.1 billion. GSK also reported a post-tax net income of £1.6 billion, representing an 18% growth for the quarter.[3] GSK's earnings beat analyst estimates by almost $200 million for the quarter.[4]
In Q4 2009, GSK reported sales of £8.09 billion, a growth of 17% over the same quarter of 2008. Earnings rose 33% to 35.4 pence per share. GSK's growth for the quarter was largely driven by increased sales in its healthcare division and emerging markets. Profits also got a boost from sales of the H1N1 vaccine and an HIV partnership with Pfizer.[5] GSKs earning for the quarter beat analyst expectations.Despite the higher-than-expected earnings for the quarter, GSK announced job cuts and research cuts, including large cuts in its antidepressant research. This comes in the face of tightening conditions for the industry as a whole as patent expirations threaten drug prices.[6]
In Q3 2009, GSK reported sales of £6.76 billion, a growth of 3% from the same quarter of 2008. Major drivers behind the growth included boosted sales of flu vaccine, Relenza, as well as expansion into emerging markets and Japan and expansion of GSK's consumer health business. Growth was hindered, on the other hand, by decreased sales in the U.S. due to increased generic competition.[7] GSK's pretax profit reached £2.07 billion, which slightly missed analyst targets for the quarter.[8]
Recent News
Avandia
On July 13th 2010 it was reported that GSK has agreed to pay about $460 million to settle a majority of lawsuits that alleged that use of Avandia caused heart attacks and strokes. This announcement is not confirmed by GSK's spokesperson but was reported by Bloomberg News. This report came as GSK defended Avandia's safety during a two-day meeting with the FDA. [9]
The outside expert committee has recommended that Avandia should be kept on the market but with additional warnings. 20 of the 33 member committee voted to keep the drug on the market. They agreed that the data raised concerns about heart attacks associated with the pill but not enough to warrant its complete withdrawal from the market. The FDA will rule on this in the upcoming months. The FDA in general follows the advice of it's advisory's committee.[10]
On Sep 23,2010, the FDA and drug regulators in Europe announced Avandia would no longer be widely available. The drug’s sales will be suspended entirely in Europe, while patients in the United States will be allowed access to the medicine only if the patients and their doctors attest that they have tried every other diabetes medicine and that patients have been made aware of the drug’s substantial risks to the heart. Patients now taking Avandia may continue to do so.[11]
On Oct 22,2010, GSK announced Avandia is under investigation by federal and state law enforcement officials in the U.S. The company received a subpoena from Department of Justice, which is investigating the development and marketing of Avandia. The company received similar requests for information from attorneys general in several states.[12]
Whistle Blower Lawsuit
On Oct 27,2010, the company announced it has agreed to pay $750 million to settle criminal and civil complaints that the company for years knowingly sold contaminated baby ointment and an ineffective antidepressant. Altogether, GSK sold 20 drugs with questionable safety that were made at a plant in Puerto Rico that for years was rife with contamination.
Whistleblower Cheryl Eckard, the company’s former quality manager, asserted in her suit that she had warned the company of the problems but GSK fired her instead of addressing them. The share to the whistle-blower will be $96 million, one of the highest such awards in a health care fraud case. The criminal fine would $150 million, the highest ever for a manufacturer of adulterated products; $600 million were provided for civil penalties. There is a rising trend of whistle blower lawsuits as big pharma reduces its headcount to counter-act lower sales and lack of new blockbuster approvals.[13]
Business Segments
GlaxoSmithKline has three different product areas: prescription medication, consumer health, and vaccines. While each of these units is sizable, GlaxoSmithKline is especially dominant in the vaccine market, supplying roughly one quarter of all vaccines worldwide. Some of its best known consumer products include Tums (antacids) and Aquafresh (toothpaste). GlaxoSmithKline's prescription products include medications to treat cancer, asthma, malaria, and depression among other maladies.
Products and Revenue
Pharmaceutical (GBP 27.3 Billion)
The bulk of GlaxoSmithKline’s revenues -- 83% in 2009 -- comes from the sale of prescription medications. GlaxoSmithKline has medications in many different therapeutic categories, including cardiovascular, respiratory, and central nervous system. Some of its most important prescription products include:
Seretide/Advair (GBP 5 Billion): This product is a long-acting bronchodilator, meaning it opens up the patients' air passages, and an anti-inflammatory taken through an inhaler. Seretide/Advair is approved to treat asthma and Chronic Obstructive Pulmonary Disease (COPD). In 2004, it was estimated that roughly 20 million Americans (between 5 and 10%) have asthma; there is clearly a very large market for treatments. While there are no indications that the number of cases of asthma is growing, there has been no marked decrease either. Further, it is possible that in developing countries with laxer safety conditions in the workplace, more cases of occupational asthma could develop, providing new markets for this medication.
In a new study by the FDA, however, Seretide/Advair was linked to an increase in serious long-term asthma-related side effects. Similar drugs of the same class from other major drug manufacturers were also implicated, making any regulatory action likely unilateral. [14]
Avandia (GBP 771 million): Avandia is a metabolic product for the treatment of diabetes. It is used to level insulin levels and is very effective in mitigating type 2 diabetes. Despite its high sales, however, Avandia has recently faced some challenges in the United States. An advisory committee of the Food and Drug Administration (FDA) in July 2007 found that Avandia carries potential cardiovascular risks. While the FDA has not decided to remove the drug from the market, in November of 2007 Avandia received a black box warning, the severest possible. Sales in 2009 fell by 16 percent. A major study assessing the risk of the drug will not be complete until 2014. The FDA is holding a Joint Meeting of the Endocrinologic and Metabolic Drugs Advisory Committee and the Drug Safety and Risk Management Advisory Committee Meeting to evaluate the safety of Avandia on July 13-14 2010.[15] On Sep 23,2010, the FDA and drug regulators in Europe announced Avandia would no longer be widely available. The drug’s sales will be suspended entirely in Europe, while its distribution in the US would be severely restricted.[11]
Anti-Virals (GBP 4.2 billion): GSK's anti-virals franchise, which includes genital herpes treatment Valtrex, HIV treatment Epzicom, and influenza treatment Relenza. Total anti-viral sales grew 12% in 2009. GSK is also seeing greatly increased sales of its flu treatment, Relenza, in the wake of the global Influenza outbreak of 2009. It is just one of two drugs approved for treatment to reduce the effects of the swine flu virus, the other being Roche Pharmaceuticals (RHHBY)'s Tamiflu. Governments are stockpiling both in the event the disease becomes resistant to one of the drugs. [16]
Vaccines (GBP 3.7 Billion)
As mentioned above, GlaxoSmithKline currently produces nearly a quarter of vaccines sold worldwide. Its vaccines are used to treat a wide range of ailments including hepatitis, meningitis, influenza and various childhood diseases. Specific products include Havrix for hepatitis A, Engerix-B for hepatitis B, and the group Mencevax for meningitis.
Although demand for vaccines has remained generally constant, there are several situations that could cause fluctuations. If the birth rate were to suddenly increase, more children would need vaccines against childhood diseases such as measles, mumps, and chicken pox. Additionally, an influenza outbreak would vastly increase demand for flu vaccines. There has not been a major outbreak in several decades, and the Center for Disease Control (CDC) expects that an outbreak could occur in the coming decades.
A recent European study has shown GlaxoSmithKline's Rotarix, a new rotavirus vaccine, to be highly effective. Rotavirus causes severe diarrhoea in young children. Compared to the control group, children given Rotarix were 90% less likely to develop symptoms. Rotarix will be in direct competition with Merck's Rotateq, which is also in late clinical trials.
On October 6, 2009, GSK announced that it had received orders for 149 million additional doses from governments around the world for its Pandemrix™ H1N1 vaccine, bringing its total orders up to 440 million, worth approximately $3.5 billion.[17][18] Analysts estimate H1N1 vaccine sales to reach $1.44 billion in Q4.[19] However, as the 4th quarter closes for vaccine-makers such as GSK, reports show that H1N1 sales have fallen well below analyst estimates. Analysts now predict pandemic vaccine sales for GSK to reach about £835 million, or about half of the earlier estimates.[20]
Consumer Health Care (GBP 4.7 Billion)
GlaxoSmithKline's consumer health care products include over-the-counter medications, nutritional supplements, and oral care products. Some of the major products include Aquafresh, a well-known toothpaste brand, Sensodyne, a toothpaste specifically for sensitive teeth, Tums and Citrucel for gastro-intestinal ailments, and Nicorette products to help users quit smoking.
Research and Development
The development process for new drugs is a risky and expensive business. In 2009, GlaxoSmithKline spent GBP 4.11 Billion on research into new treatments and products, nearly 6.9% of its total sales. The process from concept to market takes anywhere from 10 to 15 years. Most medications do not make it past the clinical trials phase of development. For every success there are multiple failures. The final product, once formulated, is protected under patent for generally less than 10 years after release. GlaxoSmithKline has one of the broadest pipelines, or group of potential products, in the industry. By the end of 2009, there were 30 products in Phase III (late stage) development. While many of these drugs will ultimately fail, the possibility of even one being a blockbuster(annual sales of over $2B) can help the company achieve sales targets for the next 5 years.[21]
Andrew Witty, the CEO of GSK, upon his promotion in 2007 changed the way the company conducted research and development. He eliminated "me-too" drug research and shut down research in areas of depression, anxiety, pain and other mature categories, concentrating focus on emerging markets. He divided the early-stage research into 40 autonomous biotech-style research teams, with between 7 and 70 scientists each. Each unit leader is like the head of a little biotech company and got to set a three-year budget and freedom to invest it as he/she saw fit. This practice is innovative and has let to interesting collaborations and leads but no products have emerged as yet.[22]
Trends and Forces
Tightening FDA Regulations
When FDA commissioner Margaret Hamburg began her tenure in 2009, she announced that the FDA would toughen it's enforcement efforts to protect public health.[23] As the FDA has drawn criticisms for its failures in preventing deaths caused by drugs such as Vioxx, Hamburg has come in with several fixes that include stricter monitoring of drug adverse events, more funding for the agency, stronger ability to force product recalls, and more scientific expertise within the agency.[24] On May 19, 2010, the FDA announced 21 proposals aimed at increasing transparency to the public regarding regulatory information.[25]
Such information will increase the amount of information accessible to the public with regard to companies' pipeline drugs and manufacturing facilities that might otherwise not have been disclosed. While the tightened regulations and increased transparency will eventually improve the overall quality of pharmaceutical products, there will be growing pains as companies adjust to the stricter standards and stronger enforcement. GSK's ability to adjust to these new standards will impact its valuation and financial success.
GSK plans growth in emerging markets
In December 2009, GSK announced a three-pronged plan strategy to expand its presence in emerging markets. The plan includes scaling up its branded generics business, obtaining more government contracts for its vaccine business, and pushing more of its patented medications in developing countries. The emerging market, which includes rising middle classes in Asia, Latin America, the Mid-East and Africa, is already estimated at $81 billion and is growing fast enough to double by 2020.[26] GSK has already looked at expanding its branded generic's business, acquiring such businesses from Eli Lilly and UCB Pharma, and is striking deals with established emerging market generic companies such as India's Dr. Reddy's Labs and Africa's Aspen Pharmacare.GSK faces strongest competition in this area from Pfizer, Novartis, and Sanofi Aventis[27] GSK's ability to capitalize on emerging markets will have a significant impact on its growth during the coming decade.
Patent expirations
Proportion of GSK's revenue that is earned from drugs whose patents will expire or have expired during the time-frame on the x-axis.[28]
For a detailed discussion of brand name vs. generic medication, see also Generic drugs.
Patent exclusivity is essential within the pharmaceutical industry, where the market exclusivity granted by patents enables companies to enjoy a period of high profitability necessary to justify the high costs of development for a novel therapeutic. Moreover, in the pharmaceutical industry, a single patent covering the active ingredient of the drug can oftentimes represent the entire unique value of that product.[29]
The United States, European Union, Japan, and most developed nations in the world offer an accelerated generic drug approval process whereby competitors can develop generic versions of brand name drugs with expired patents. The accelerated approvals, known as ANDAs in the US, only require that the sponsor company show that their drug is equivalent to the name-brand drug, enabling that company to bypass the expensive and time consuming clinical trials required of a novel drug.[30] The relatively cheap cost to develop generics in comparison to name-brand drugs enables generic companies to substantially undercut prices, to the tune of $10 billion total, annually across the industry.[31]
GSK lost patent exclusivity to several major drugs from 2006 to 2008, including Wellbutrin XL, Lemactil, Zofran, and Coreg. GSK's major genital herpes therapy Valtrex, which brought in €1.2 billion in 2008, is set to lose patent exclusivity at the end of 2009, and their blockbuster asthma therapy Advair, which earned over €4.1 in 2008, will lose exclusivity in 2010. By 2011, 43% of GSK's 2008 revenue will be represented by drugs that will face generic competition. However, it is important to note that GSK already earns almost €5 billion from drugs with expired patents. Moreover, GSK spends 15.1% of sales on R&D and will look to compensate for these anticipated losses through the development of novel therapies.[32]
Politics and Insurance
Like other global pharmaceutical companies, GlaxoSmithKline faces constant pressure from governments and activist organizations to increase access to medications by either lowering prices substantially or removing patent restrictions so generics can be manufactured.
Medicare and Medicaid policies have an important impact on GlaxoSmithKline's sales. Medicare is the federal government's health subsidy plan while Medicaid generally falls to the states. Policies allow the government to bargain for lower prices; essentially the government caps prices for a large number of plans. This lowers revenues while increasing the amount of medications sold. Additionally, the government often requires rebates be paid at the end of the year.
Over the past several years, many states and the federal government have begun suing multiple pharmaceutical companies because of alleged price fraud. The states are suing based on alleged defrauding of the state health care assistance program, Medicaid. If the states win, the pharmaceutical companies will be forced to pay hundreds of millions of dollars and change pricing schemes. While the first trial in these cases will not be finished for at least another year, this litigation could greatly affect GlaxoSmithKline. Additionally, changes in Medicare and Medicaid legislation could cut into revenues even more in the future, especially if nationalized or cheaper health care advocates come into office.
There are currently no well publicized cases against GlaxoSmithKline other than these pricing cases, but just under a year ago the company settled for $63.8 million on claims that it promoted its antidepressant drug Paxil for use by children while withholding information about the medication's safety. The suit was a class action, and highlights the constant threat of litigation and the care that must be taken in marketing pharmaceutical products.
Flu Pandemics/Epidemics
There is always a threat of a regional or even global outbreak of a major influenza virus. For example, the Spanish influenza pandemic of 1918 infected 500 million people and killed 10% of victims.[33] More recently, the Avian flu of the early 2000s killed at least 200 people around the world, particularly in Southeast Asia.[34] The Swine flu scare of April 2009 similarly has threatened countries all over the world, and the possibility that it could turn into a major flu pandemic is a serious concern. Public health officials all over the world have stocked up on vaccines and treatments in the event of such an outbreak. GlaxoSmith Kline's Relenza is one of two approved influenza treatments, along with Roche Pharmaceuticals (RHHBY)'s Tamiflu. A sustained period of calm can result in decreased demand for Relenza and hurt GSK's bottom line, but renewed fear of outbreak (such as the Swine flu scare) can be a significant boon to earnings. GSK increased production capacity of Relenza in 2009 to 190 million treatment courses in anticipation of such an event.
On September 25, 2009, the European Committee for Medicinal Products for Human Use (CHMP) recommended approval of GSK's H1N1 vaccine, Pandemrix™. This recommendation means that the vaccine will be immediately reviewed for approval to market for H1N1 prevention. GSK is currently conducting 16 clinical trials with 9000 patients to further evaluate the effectiveness of the vaccine against the H1N1 virus.[35] On October 6, 2009, GSK announced that it had received orders for 149 million additional doses from governments around the world for its Pandemrix™ H1N1 vaccine, bringing its total orders up to 440 million, worth approximately $3.5 billion.[36][37]
In January 2010, reports indicated that pandemic flu vaccine sales were below original estimates, as many countries found themselves with more doses than required to meet demand. Germany led the way in cutting orders, slashing the amount of H1N1 vaccines on order by 30%. The UK, France, Spain, Netherlands, and Belgium are discussing cuts as well.[38] Analysts now predict pandemic vaccine sales for GSK to reach about £835 million, or about half of the earlier estimates.[39]
Comparison to Competitors
The pharmaceutical market is a very competitive arena on several fronts. First is the generic competition and loss of patent, as discussed above. Other competition includes branded competition amongst drugs with similar indications .
Advair, one of GlaxoSmithKline's biggest drugs for asthma (see above) faces competition from AstraZeneca's 's Symbicort, which is expected to launch in 2007. Additionally, Avandia, the diabetes drug discussed above, will likely face competition from Merck (MRK)'s new oral diabetes drugs Januvia and Janumet. If the FDA decided to require warnings on Avandia concerning heart failure, Merck (MRK) could very easily take a large portion of the type 2 diabetes market share.
Successful competition requires diversification, size, investment in research (including a broad pipeline) and of course minimization of costs and high sales. GlaxoSmithKline is far ahead of the competition as far as new research. It has nearly double as many drugs in late stage development as its closest competitor, Pfizer (PFE). GSK, however, has significantly lower earnings than Pfizer despite having significantly similar sales. This is largely due to the company's higher operating costs and the costs associated with its recent acquisitions. GlaxoSmithKline's biggest competitors include Pfizer (PFE), Novartis AG (NVS), Merck (MRK), and Schering-Plough (SGP).
Competition in the pharmaceutical industry lies mostly in specific drug markets. For example, a new diabetes drug is not going to have any effect on an existing cholesterol drug, no matter how successful it is. As a result, financial data on the pharmaceutical companies do not tell the whole story. Instead, it may be more appropriate to analyze GSK's competitors by each drug market (See section on Major Drugs and Industry Trends).
The table below displays competitive operating metrics for competitors within the pharmaceutical industry. Note that the total revenue for Merck and Pfizer was influenced by revenue inherited from their acquisitions of Schering-Plough and Wyeth, respectively. In addition, net income for Merck was bolstered by $3.2 billion from the sale of its animal division [40], while Bristol-Meyers Squibb's net income saw a one-time $7.2 billion increase from the sale of its nutrition division.[41]
Pharmaceutical and Biotech Industry — Competitive Operating Metrics (2009)
Johnson & Johnson (JNJ)
Pfizer (PFE)
Novartis (NVS)
Abbott Laboratories (ABT)
Merck (MRK)
Bristol-Meyers Squibb (BMY)
Eli Lilly (LLY)
Amgen (AMGN)
Gilead (GILD)
AstraZeneca (AZN)
Roche (RHHBY)
Revenue (in billions of USD)
Total Revenue
$61.9
$50.0
$44.3
$30.8
$27.4
$18.8
$21.8
$14.6
$7.0
$32.8
$49.1
Gross Profit
$43.5
$41.1
$32.1
$17.6
$18.4
$13.7
$17.6
$12.6
$5.4
$27.2
$34.4
Revenue Growth from 2008
-2.9%
3.5%
4.0%
4.2%
15.0%
6.2%
7.2%
-2.4%
31.4%
3.8%
7.5%
Income
Net Income
$12.3
$8.6
$8.4
$5.8
$12.9
$10.6
$4.3
$4.6
$2.6
$7.5
$7.8
Net Profit Margin
19.8%
17.3%
19.0%
18.7%
47.0%
56.4%
19.8
31.5%
37.6%
22.9%
15.9%
Operating Income
$15.8
$10.8
$10.0
$6.2
$15.3
$5.6
$5.4
$5.5
$3.5
-$11.5
$11.9
Diluted EPS Growth from 2008
-3.7%
2.5%
3.7%
21.8%
55.6%
20.7%
NA
19.6%
36.9%
23.6%
-11.8%
Other
R&D Spending
$7.0
$7.8
$7.5
$2.7
$5.9
$5.1
$4.3
$2.9
$0.9
$4.4
$9.9
Latest Full Context Quarter Ending Date
2010/09
Gross Profit Margin
80.2%
EBIT Margin
23.1%
EBITDA Margin
25.7%
Pre-Tax Profit Margin
20.4%
Interest Coverage
8.2
Current Ratio
1.5
Quick Ratio
1.1
Leverage Ratio
4.3
Receivables Turnover
4.8
Inventory Turnover
1.4
Asset Turnover
0.7
Revenue to Assets
0.7
ROE from Total Operations
40.8%
Return on Invested Capital
16.2%
Return on Assets
9.4%
Debt/Common Equity Ratio
1.51
Price/Book Ratio (Price/Equity)
6.57
Book Value per Share
$5.96
Total Debt/ Equity
1.55
Long-Term Debt to Total Capital
0.60
SG&A as % of Revenue
39.2%
R&D as % of Revenue
15.3%
Receivables per Day Sales
$74.75
Days CGS in Inventory
261
Working Capital per Share
$3.37
Cash per Share
$3.78
Cash Flow per Share
$3.54
Free Cash Flow per Share
$1.41
Tangible Book Value per Share
$-1.24
Price/Cash Flow Ratio
11.1
Price/Free Cash Flow Ratio
27.7
Price/Tangible Book Ratio
-31.53
Most recent data
5-Year Averages
Return on Equity
57.6%
Return on Assets
15.7%
Return on Invested Capital
28.7%
Gross Profit Margin
81.0%
Pre-Tax Profit Margin
30.8%
Post-Tax Profit Margin
21.4%
Net Profit Margin (Total Operations)
21.4%
R&D as a % of Sales
14.6%
SG&A as a % of Sales
32.0%
Debt/Equity Ratio
1.01
Total Debt/Equity Ratio
1.21
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