Pharmaceutical: GLAXOSMITHKLINE PAKISTAN LIMITED - Analysis of Financial Statements C Year 2000 - H 2001 2009
GlaxoSmithKline (GSK) is a world leading research-based pharmaceutical company, engaged in manufacturing and marketing of ethical specialties, other pharmaceutical, animal health and consumer products. With a powerful combination of skills and resources it provides a platform for delivering strong growth in today's rapidly changing global healthcare environment.
Headquartered in the UK, the company is one of the industry's leading companies with leadership in four major therapeutic areas - antibiotics, central nervous system (CNS), respiratory and gastro-intestinal/metabolic. In addition, it is a leader in the important area of vaccines and has a growing portfolio of oncology products.
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COMPANY SNAPSHOT
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Name of company GlaxoSmithKline
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Nature of Business Pharmaceutical
Ticker GLAXO
Net Sales CY '07 Rs 10,610,882,000
Net Sales CY '08 Rs 13,403,224,000
Share price (avg.) Rs 75.9
Market Capitalization 12,960,832,000
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GlaxoSmithKline Pakistan Limited came into existence after the merger of Smith Kline and French of Pakistan Limited and Beecham Pakistan (Private) Limited with Glaxo Wellcome Pakistan Limited in 2002. It is listed on the Karachi and Lahore stock exchanges. GSK has a large portfolio of products ranging from tablets to toothpaste to inhalers and complex capsules in over 28,000 different pack sizes and presentations. Nine of its products are amongst the top 15 brands in the country. There are 500 companies in the pharmaceutical sector of Pakistan. In 2008, the pharma market has grown by 11%.
GSK sells its prescription medicines primarily to wholesale drug distributors, hospitals, government entities and other institutions. These products are dispensed to the public by pharmacies. GSK leads the local industry in value, prescription and volume shares and a substantial size difference over its nearest competitor in the industry. It also exports it good quality products, which make around 2% of GSK's sales. Major export markets include Afghanistan, Sri Lanka, Syria and Greece. In CY08, the export business grew by 13% (CY07: 19%) and amounted to Rs 289 million (CY07: Rs 256 million). Major markets included Afghanistan, Sri Lanka and Syria.
RECENT PERFORMANCE 1H09
GSK recently announced its half yearly results, net sales has shown a marginal increase of 4.34% as last year sales included the onetime extraordinary proceeds from sale of polio vaccine to Government, Disregarding that the sale showed a decent increase of 16.56%. Export figures rose by 65.5%, major export markets being Afghanistan and Sri Lanka. The company has been performing very well in the segment of consumer healthcare where it posted a growth of 42.3% to come to 130.6 million. Other operating income has shown a decent increase of 8.3% to be Rs 253.2 million. The increase came mostly on back of higher deposit rates being offered by the banks. PAT was significantly lower at Rs 470 million, a decline of almost 35%.
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Half Half Percentage
Year 2009 Year 2008 Change
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Rupees '000
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Net Sales 7,034,450.00 6,728,990.00 4.34%
Cost of Sales 5,196,729.00 4,298,388.00 17.29%
Gross Profit 1,837,721.00 2,430,602.00 -32.26%
EBIT 909,428.00 1,292,805.00 -42.16%
Financial Charges 5,317.00 62,841.00 -1081.89%
Profit After Tax 904,111.00 1,229,964.00 -36.04%
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ost of sales and administrative expenses have been on the rise due to inflation, rupee devaluation and rising oil prices. Gross margin has been down by 4% to 26.1%. Administrative and selling expenses have risen as the company was trying to push health consumer products to enhance revenue. Scenario looks to be the same for almost all the pharmaceutical companies, following is the comparison of GSK and Abbott.
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Abbott 2009 2008 % Change
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COGS 2,869,178.00 2,070,299.00 27.8%
Sales 3,906,577.00 3,328,047.00 14.8%
COGS/Sales 73.4% 62.2% 11.2%
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GSK
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COGS 5,196,729.00 4,298,388.00 17.3%
Sales 7,034,450.00 6,728,990.00 4.3%
COGS/Sales 73.9% 63.9% 10.0%
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FINANCIAL PERFORMANCE (CY00-CY08)
Over the last nine years, GlaxoSmithKline Pakistan Limited has exhibited consistent growth in sales. In CY08, the net sales amounted to Rs 13 billion (CY07: Rs 11 billion) - representing a 26% YoY growth. In CY06, GSK had made history by becoming the first company in Pakistan's pharmaceutical industry, to cross Rs 10 billion sales mark. The growth in CY08 net sales can be attributed to the double-digit growth witnessed in sales of vaccines, antibiotics, analgesics, and gastrointestinal and cardiovascular portfolios.
The polio vaccine business made a significant contribution to the Top Line. The new products launched by GSK also registered growth. The consumer healthcare business showed a strong performance and achieved net sales of Rs 233 million - increase of 66.3% from the same period last year (SPLY). This was due to restructuring of sales and distribution arrangements. New product launches and brand developments have contributed to improved performance of the segment and made future prospects positive. The animal health portfolio has also achieved double digit sales growth to Rs 110 million.
Gross margins of the company have been severely affected despite the rising trend in net sales. The escalating inflation and significant currency depreciation coupled with price freeze since 2001 have eroded margins from 37.3% in CY07 to 28.8% in CY08. The major contributors of rise in cost of goods sold are the raw and packaging material. The decline is due to rising raw and packaging material cost due to unprecedented international commodity price hike, increase in local prices on inputs and materials due to inflation, depreciation of currency; escalation of fuel, power and utilities cost and fewer margins on tender business.
Despite high inflation and rising POL prices the company managed to keep its operating expenses under control. The selling, marketing and distribution expenses increased by 9.8% and administrative expenses increased by 6.9%. Other operating income has doubled to Rs 1,280 million in CY08 (CY07: Rs 639 million). This is due to gain on sale of land in Korangi amounting to Rs 843.5 million. Income from funds decreased to Rs 389 million or 10.2% due to reduction in surplus funds, which lowered interest income. The interest rates rose in latter part of the year and the situation improved. The company makes investments.
Capital expenditures for the year totaled up to Rs 475 million (CY07: Rs 646 million). This was spent on facility improvement and rationalization, upgradation of plant and machinery and purchase of vehicles. Due to other operating income the EBIT has significantly increased to Rs 3,078 million (CY07: Rs 2,670 million), an increase of 15%. The EBIT had declined from CY06 and increased above CY06 Level in CY08. This has contributed to the bottom line and cushioned the impact of high interest rates. The interest expense for the year amounted to Rs 77 million (CY07: Rs 12 million), an increase of 565%.
The profit after taxation amounted to Rs 1,955 million (CY07: Rs 1671 million), an increase of 17%. The PAT surpassed the CY06 level in CY08 by 8%. The ROA has increased from 16.43% in CY07 to 18.40% in CY08. The ROE has increased from 20.58% in CY07 to 23.40% in CY08. The increase in ROA and ROE can be attributed to a greater increase in PAT of 17% than total assets at 5% and total equity at 11%. The profit margin has declined from 15.74% to 14.595 in CY08 as net sales have increased by 26% while PAT grew by 17%.
The liquidity position shows an increasing trend till CY05. It has steadily declined thereafter. The current ratio has declined from 4.27 in CY07 to 4.11 in CY08. This is due to an increase of 10% in current liabilities and 6% increase in current assets. The cash and bank balances have declined by 36% and it is a source of concern as this is the most liquid asset of the firm. The bank deposits have drastically lowered from Rs 4150 million in CY07 to Rs 2,630 million in CY08.
The accounts receivable has accumulated a massive increase of 770%, signalling ineffective asset management and slow cash conversion cycle. The accrued return on investments and bank deposits have declined by 27%. The quick ratio has declined from 2.98 in CY07 to 2.31 in CY08. The quick assets have registered a 15% decline. The stock in trade have exhibited 53% growth and led to a marginal increase in current assets. The short term loans and trade payables have increased by 10% and 12% respectively.
The asset management ratios had followed a consistent downward trajectory since 2001 to 2007. The asset management in 2000 showed poor performance and in CY08 the company's liquidity has substantially reduced. The inventory turnover (days) has increased from 77 in CY07 to 94 days in CY08. The day sales outstanding (DSO) has increased from 4 days in CY07 to 27 days in CY08. The overall operating cycle has increased from 81 days in CY07 to 121 days in CY08.
The DSO has changed significantly primarily due to a steep incline in accounts receivables from Rs 117 million in CY07 to Rs 1,017 million in CY08 - 770% increase. The upside is that most of the accounts receivable stuck is considered good and is owed by other companies and not associates. The doubtful accounts provision has increased from Rs 2.9 million in CY07 to Rs 4.6 million in CY08. The stocks-in-trade (inventory) has seen a 53% buildup and now stands at Rs 3,494 million. The company needs to make its credit policies more stringent and curb inventory build-up. The cash balances of the company have lowered down significantly from CY07. This is due to the increase in the operating cycle.
Total asset turnover of the company has shown a negative trend over the years. This decline is due to the fact that the company has been investing in its fixed assets, mainly in plant, machinery and infrastructure up gradation. Capital expenditure of Rs 646 million was made in CY07 of which significant portion went to facility improvement and rationalization. This indicates that the increase in the number of sales, was expected by the company and it took the necessary measures and invested in its total assets accordingly.
However, in CY'08 the total asset turnover has shown an increase from 1.04 in CY07 to 1.26 in CY08. The capital expenditures were reduced to Rs 475 million in CY08. The increase in total assets was by 5% while the increase in net sales was by 26%. The sales/equity ratio also follows the same pattern as that of TATO. This is showing a declining trend 2002 inwards because of increasing equity base of the company both due to increasing reserves and paid-up capital over the years. Both sales/equity and TATO ratios have plunged in CY07 mainly on account of increased assets base due to investments and capex. The sale to equity has increased from 1.31 in CY07 to 1.60 in CY08.
The debt management ratios of the company have significantly improved over the years. The debt to asset (D/A), debt to equity (D/E) and long term debt to equity (L.D. /E) ratios show a visible decline over the years. In CY08, the D/A has slightly increased from 0.20 in CY07 to 0.21 in CY08. The D/E ratio has increased from 20.58% in CY07 to 23.40% in CY08. The LD/E ratio has remained stable at 0.04. During the first two years we can see that the D/E ratio remains practically the same though it is very high that it is risky for current or future investors to invest in the company.
CY01 shows a dramatic decrease in the ratio as the company's net profits increased by greater margins whereas it significantly decreased its liabilities. Similarly, 2002 shows a major change in the debt to equity ratio as the sales increased resulting in higher and higher profits while the company divested from credit financing. However, both D/A and D/E increased slightly in CY06 mainly because of higher trade payables, which can be attributed to the high cost of doing business. Both these ratios remained flat in CY07 showing that GSK continues its trend of lower debt reliance.
Looking at the declining long-term debt to equity ratio, we can see that a majority of the credit financing was short term throughout the years. During the initial years a majority of the current liabilities consisted of creditors and accrued expenses however, during the latter years continuing till CY07 it comprises of short term loans and trade payables, as the company has divested from accrued expenses and other creditors. The falling debt ratio shows that the risk to a current or future investor in the company is decreasing. The company is becoming more financially stable and in a better position to borrow now and in the future, if the need arises.
GSK's TIE ratio shows great variation throughout the years. The TIE ratio substantially increased in CY03, CY05 and CY07. These years have seen comparatively higher EBIT relative to interest expense. In CY08, the EBIT amounted to Rs 3,078 million (an increase of 15%) but the interest expense registered a phenomenal increase of 565%. This plunged the TIE ratio to 40.05 in CY08 from 231.18 in CY07. In 2002 we see an increase in the company's ability to pay off debts, due to an increase in EBIT because of a major increase in the net sales. In 2001, 2002 and 2003 this ratio was relatively low compared to the subsequent years as the company was in credit with third parties and had accrued expenses along with dividends.
CY03 again shows the greatest deviation by far as the company earned a lot more than the interest payments that were required to be paid. The interest payments in this year decreased significantly as the company divested from creditors and accrued expenses along with dividends and instead only had outstanding financial charges on trade payables. During 2004 the TIE ratio again dipped due to a high amount of taxation along with trade payables.
The CY05 shows a high tie ratio which is due to a significant rise in the EBIT because of greater net sales as compared to prior year along with a reduction in the interest charges due to trade payables and taxation however, this huge jump in the tie ratio is because of the rise in net sales. However, in 2006 again TIE nose-dived because of rising interest rates due to SBP's tight monetary stance. But it recovered greatly in CY07, due better EBIT and lower finance costs.
The earnings per share for GSK are erratic. Initially in 2000 the EPS was high (11.29) due to a high net income and a relatively low amount of outstanding shares. In 2001, however, there was a great decrease in the EPS (from 11.29 to 2.88) this was due to a great drop in the net income of GSK because of high COGS and administrative and other expenses while the total outstanding shares remained constant from the previous year. In subsequent years GSK has continually stabilized its EPS due to greater sales and a relative drop in expenses which have resulted in a higher net income.
A dilution can be seen in CY07 EPS due to issuance of new shares. The EPS has increased from Rs 9.79 in CY07 to Rs 11.46 in CY08. This is because the earnings (PAT) shows an increase of 17% but the number of share outstanding remain unchanged. Initially investors were willing to pay relatively little for a dollar of GSK's book value however during the recent years the company has turned into a financially strong setup. A major factor of the increase in this book value per share is the continuous increase in its equity base mainly by issuance of new shares. Some dilution effect can be seen in CY07's BVS.
Despite significant capital expenditure over the years, the overall cash position of the company improved which is evident by the positive trend of DPS. Though it declined on a YoY basis, it has increased from Rs 5/share in CY01 to Rs 7.5/share in CY07, showing a good return to its shareholders as the primary objective of GSK. In CY08 the dividend per share was Rs 7.0/share. In 2000, we see that the price/earnings ratio was relatively low which can sometimes signify poor growth prospects.
This was due to a high market price with relatively low EPS. This signified that the firm was risky for investing. A sharp sudden shoot up is seen in 2001 due to a sharp decline in the EPS though there was a relative decline in the price per share. The P/E ratio has declined from 19.66 in CY07 to 6.63 in CY08. This is due to combination of low price and high EPS. The market price of the share in December 08 was Rs 75.9/ share (Dec07: Rs 192.4/share) while the EPS was Rs 11.46/share (Dec07: Rs 9.79/share). The investor expectations are down compared to the last few years. The stock prices are generally low due to economic recession in the country and weak trading at the stock exchange. The stock price trend of the period September 08 to September 09 shows that the stock prices have recovered the crisis. The prices peaked in June 2009 to Rs 143.60/share but fell to Rs 99.5/share in September 09.
FUTURE OUTLOOK
In FY09-10 budget customs duties have been reduced from 25 percent and 10 percent to just 5 percent on import of 19 types of raw materials and active ingredients as well as chemicals. The customs duty on import of packaging material like polyacrylate, piston caps, laminated heat sealable paper, kraft paper (wax coated) non-woven fabric and non-woven paper. This will provide relief to the sector that was grappling with high cost of goods sold with major contributor being raw and packaging material.
The prices of the pharmaceutical products have been static since 2001 and there has been no offset to account for the adverse impact of rising inflation (particularly in energy and fuel costs), raw and packaging material costs and devaluation. The business improvement initiatives undertaken in past few years by GSK, have contributed towards its the enhanced operational efficiencies and cost savings. However, this beneficial impact is eroding and will continue to do so unless the Government implements the existing notified policy of allowing price adjustments to offset inflation and devaluation. This is essential if the industry is to sustain itself for future.
In recent few years, Pakistan has made some progress in updating its Intellectual Property Rights (IPR) laws to the levels required by global conventions. Practically, much more needs to be done to discourage both piracy and counterfeiting. Its effective implementation will not only protect the consumers, but also the industry and result in quality and research oriented culture. GSK will also continue to focus on introducing innovative medicines developed through its global R&D effort.
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GSK FINANCIALS
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Income Statement (PKR mn) CY'00 CY'01 CY'02 CY'03 CY'04 CY'05 CY'06 CY'07 CY'08
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Net Sales 604 875 6,993 8,101 8,867 9,417 10,088 10,611 13,403
Cost of Goods Sold 330 585 4,526 4,941 5,361 5,570 6,222 6,659 9,548
Gross Profit 274 290 2,467 3,160 3,506 3,846 3,867 3,952 3,856
Selling, General & Admin. Expenses 237 288 1,662 1,577 1,390 1,489 1,712 1,921 2,057
Other Income 45 32 172 101 188 350 496 639 1,280
Operating Profit / EBIT 82 34 977 1,683 2,304 2,708 2,651 2,670 3,078
Interest Expense 1 2 18 9 29 13 19 12 77
Profit/Loss Before Taxation 74 30 886 1,548 2,119 2,694 2,632 2,659 1,001
Tax Expense 23 17 344 522 648 881 967 988 1,046
PROFIT/LOSS AFTER TAXATION 51 13 543 1,026 1,471 1,814 1,665 1,671 1,955
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Balance Sheet (PKR mn) CY'00 CY'01 CY'02 CY'03 CY'04 CY'05 CY'06 CY'07 CY'08
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Cash and Cash Balances 66 86 1,700 2,246 3,054 3,984 4,666 4,253 2,725
Stocks and Spares - 1 47 55 54 53 65 107 116
Stocks-In-Trade 235 184 1,412 1,605 1,632 1,973 2,195 2,277 3,494
Accounts Receivables 36 25 94 72 33 65 85 117 1,017
CURRENT ASSETS 387 372 3,628 4,368 4,970 6,519 7,530 7,520 7,970
Operating Fixed Assets 102 112 1,214 1,372 1,384 1,320 1,355 1,960 2,242
Capital Work in Progress 21 14 182 88 50 184 420 277 173
Long Term Loans 2 1 49 55 48 40 36 54 62
Investments - - - - 407 192 96 347 172
NON-CURRENT ASSETS 142 154 1,459 1,524 1,895 1,741 1,913 2,644 2,656
TOTAL ASSETS 529 526 5,086 5,892 6,865 8,261 9,444 10,165 10,626
Trade Payables - - - 1,052 954 894 1,598 1,698 1,867
CURRENT LIABILITIES 159 144 1,283 1,052 1,092 1,267 1,704 1,761 1,938
NON-CURRENT LIABILITIES 42 55 247 257 225 256 203 286 333
TOTAL LIABILITIES 202 199 1,530 1,309 1,317 1,523 1,907 2,047 2,271
Share Capital 45 45 506 728 874 1,092 1,365 1,707 1,707
Reserves 255 255 2,854 3,855 4,674 5,646 6,172 6,411 6,648
SHAREHOLDERS' EQUITY 327 326 3,557 4,583 5,548 6,738 7,537 8,118 8,355
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PROFITABILITY RATIOS CY'00 CY'01 CY'02 CY'03 CY'04 CY'05 CY'06 CY'07 CY'08
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Gross profit margin 45% 33% 35% 39% 40% 41% 38% 37% 29%
Profit Margin 8% 1% 8% 13% 17% 19% 17% 16% 15%
Return on Assets 10% 2% 11% 17% 21% 22% 18% 16% 18%
Return on Equity 16% 4% 15% 22% 27% 27% 22% 21% 23%
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LIQUIDITY RATIOS CY'00 CY'01 CY'02 CY'03 CY'04 CY'05 CY'06 CY'07 CY'08
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Quick ratio 0.95 1.30 1.73 2.63 3.06 3.59 3.13 2.98 2.31
Current Ratio 2.43 2.58 2.83 4.15 4.55 5.15 4.42 4.27 4.11
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ASSET MANAGEMENT RATIOS CY'00 CY'01 CY'02 CY'03 CY'04 CY'05 CY'06 CY'07 CY'08
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Inventory Turnover(Days) 140 76 73 71 66 75 78 77 94
Day Sales Outstanding (Days) 21 10 5 3 1 2 3 4 27
Operating cycle (Days) 162 86 78 75 68 78 81 81 121
Total Asset Turnover 1.14 1.67 1.37 1.37 1.29 1.14 1.07 1.04 1.26
Sales/Equity 1.85 2.68 1.97 1.77 1.60 1.40 1.34 1.31 1.60
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DEBT MANAGEMENT RATIOS CY'00 CY'01 CY'02 CY'03 CY'04 CY'05 CY'06 CY'07 CY'08
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Debt to Asset 0.38 0.38 0.30 0.22 0.19 0.18 0.20 0.20 0.21
Debt to Equity Ratio 0.62 0.61 0.43 0.29 0.24 0.23 0.25 0.25 0.27
Times Interest Earned 64 21 55 180 81 204 137 231 40
Long Term Debt to Equity(%) 13% 17% 7% 6% 4% 4% 3% 4% 4%
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MARKET VALUE RATIOS CY'00 CY'01 CY'02 CY'03 CY'04 CY'05 CY'06 CY'07 CY'08
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Earning per share 11 3 7 14 13 13 12 10 11
Price/Earnings Ratio 8 26 11 14 13 14 13 20 7
Dividend per share 5.20 5.00 6.00 7.00 7.00 8.00 8.00 7.50 3
Book value per share 73 73 49 63 51 49 59 44 48
No of Shares Issued (millions) 5 5 73 73 109 137 137 171 171
Market prices(Year End) 90 75 85 191 181 186 158 192 76
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
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