GlaxoSmithKline (GSK) is a world leading research-based pharmaceutical company, engaged in manufacturing and marketing of ethical specialties, pharmaceutical, animal health and consumer products. With a powerful combination of skills and resources, it provides a platform for delivering strong growth in present day's fast changing global healthcare environment.
Headquartered in the UK, the company is one of 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 vaccines and also has a growing portfolio of oncology products.
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 under the scheme of arrangement for amalgamation sanctioned by Sindh High Court with effect from January 1, 2002. It is listed on the Karachi and Lahore stock exchanges.
GSK has a large portfolio of products ranging from tablets, toothpaste to inhalers and complex capsules in over 28,000 different pack sizes and presentations. Eight of its products including augmentin, amoxil, septran, panadol, ampiclox, calpol, ventolin, betnovate, zantac and seretide, are amongst the top 15 brands in the country. 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.
RECENT RESULTS H1'08The sales in H1'08 increased by 27.3% to Rs 6,729 million, as compared to H1'07. The major increase came through the government tenders for medicines and polio vaccines. Exclusion of the polio vaccine tender would result in a scaling of the sales to a level of 11% increase only.
Export sales showed a decline of 13.7%, while the consumer business showed more than 100% increase. Margins remained under pressure both on local and international front because of inflationary pressures as well as devaluation of the currency. Fuel, raw material, packaging, and other costs increased without a concurrent increase in the prices, leading to shrinkage of the margins. The prices have remained without any revision since 2001, and this leads to shrinkage of margins along with a disincentive for the industry to further invest in R&D and other developmental activities.
Financial charges increased nearly 12-fold, resulting further decline in the margins. Major portion of this charge was loss recorded due to devaluation of rupee in 2Q'08. PBT as a percentage of sales declined to 18.2% compared 25.1% for the corresponding period in FY'07. The other income was also low because of lesser cash available to put in interest bearing accounts. A swell in the accounts receivables has been witnessed due to trade dues from the government.
Despite higher sales volume, GSK recorded a PAT of Rs 735 million, an EPS of Rs 4.31, which is 12% lower than the last year. Major reasons being upward pressures on costs, both locally and internationally without a corresponding increase in prices.
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 good quality products, which make around 2% of its sales. Major export markets are including Afghanistan, Sri Lanka, Syria and Greece. In FY07, the export business grew by 19.4% and amounted to 256 million.
FINANCIAL PERFORMANCE (FY00-FY07)Over the last four years, GlaxoSmithKline Pakistan Limited has performed strongly delivering consistent sales, profit and productivity growth from operational excellence. In FY06, GSK made history by becoming the first company in Pakistan's pharmaceutical industry to cross Rs 10 billion sales mark. It continued its strong growth momentum in FY07.
Net sales in 2007 at Rs 10.6 billion, grew by 5.18% primarily due to volume growth, as prices have remained static since 2001. This sales growth was mainly led by strong performances in the vaccines, antivirals, central nervous system (CNS) and dermatology portfolios. Introduction of new products in recent years also contributed towards the good sales growth. However, this robust sales growth was threatened by shortages in raw material supply due to import restrictions. The issues were resolved later and expected to impact positively on FY08 sales.
As clearly evident, the increasing trend of the profit and gross profit margins was adversely affected in 2007 due to rising inflation on cost of materials and high fuel and energy costs. However, continual improvement in business processes and sustained investment in product promotion helped sustain the operational excellence and cost containment initiatives in manufacturing and commercial operations and procurement. Hence we see almost flat gross and net margins in FY07. The company foresees further erosion in its margins and overall profitability without any price increase compensating for the escalating costs.
Initially, the company had a relatively low ROA and ROE mainly due to a low EBIT and high interest costs due to a relatively high usage of debt through creditors. The lowest return can be seen in 2001 when the company's EBIT fell to an all time low due to a great amount of expenses and increased COGS along with high financial charges.
The company then recovered somewhat from the depression making increase in its sales and reducing the COGS and administrative expenses even the financial charges for 2002 were relatively lower than the previous years. An increasing trend can be seen from 2002 onwards basically due to the high EBIT. The company indeed, has been earning higher and higher profits from sales and reducing its financial charges.
However like profit margins, ROA and ROE also showed a decline in 2006 due to high expenses that can be attributed to high inflation and increase in fuel prices. The same trend continued in FY07.
The liquidity position shows an increasing trend till FY05. During the first three years GlaxoSmithKline had a relatively low current ratio around 2.48, 2.53 and 2.83 showing that its liquidity position was relatively weak.
In 2000 and 2001 this increase in the amount of current liabilities was basically due to creditors and accrued expenses whereas in 2002 the current liabilities had significantly increased due to the increase in dividends.
We can see a significant increase in the current ratio in 2003 (4.15). This improvement in the company's liquidity position was due to a great increase in the cash and cash balances with the current liabilities only being the short term loans. In later years, though the company has kept its inventory level high but has balanced it by increasing its cash balances by a great extent and lowering its liabilities by divesting from creditors and accrued expenses. However, in FY07 the current ratio at 4.3 was comparatively lower than last 3 years because its current assets declined coupled with an increase in its current liabilities (mainly trade payables).
Quick ratio showing a better picture also followed CR trend and declining in FY07 on account of decreasing CA (mainly due to the reduced cash and equivalents for Capex and increased DPOs.)
The 2000 inventory turnover ratio and operating cycle show that the company was probably not generating enough business or, it was holding too much inventory.
A great change can be seen in 2001 as the inventory turnover ratio decreased by a huge amount. This was due to the major increase in sales and a relative decrease in inventories as compared to previous years.
In subsequent years to 2004 the inventory level has gone down relative to its cash and cash balances however, the company has increasing inventory turnover from 2005 onwards. This is mainly due to capital expenditure made on facility improvement and rationalization.
From the days sale outstanding we can see that initially it took the company around 21 days to collect its receivables. The company however very quickly reduced the average collection period by a great amount. This was in major due to a great increase in sales with a decrease in credit sales.
Even in subsequent years the company kept its credit sales low and increased its sales by a great amount each year with the average collection period being reduced to a mere 1 day in 2004 due to a great dip in the receivables in that year. In Last two years it has increased to 2.48 and 3.02 respectively due higher credit sales.
The operating cycle hence showed an increase in FY05, FY06 and FY07 due to rise in ITO and DSO in the respective years. One can also witness flat operating cycles in FY05, FY06 and FY07, hovering around 79-81 days. One hopes that FY08's cycle deviates positively from the prevailing trend.
The total asset turnover of the company has shown a negative trend over the years. A slight variation can be seen in 2001 due to a slight reduction in total assets than in 2000 with an increase in the net sales.
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 FY07 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.
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 FY07 mainly on account of the increased assets base due to investments and capex. Looking at GSK's debt management ratios one can say that the company even in its initial years had a relatively good financial standing.
Around 38% of the total financing came from creditors in 2000 implying that the company's equity financed more than half of the total. After 2001, the D/A ratios have significantly declined due to a great decrease in the company's total debt as opposed to the increase in its total assets over the years. This again confirms our finding that GSK is increasing its equity base.
During the first two years we can see that the D/E ratio remains practically the same though it is very high signifying that it is risky for current or future investors to invest in the company. FY01 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 FY06 mainly because of higher trade payables, which can be attributed to the high cost of doing business. Both these ratios remained flat in FY07 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 FY07 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.
Looking at GSK's TIE ratio we see a great variation throughout the years. During 2000 the tie ratio was relatively high depicting that earnings were available to meet the interest payments. We can see a great reduction in the tie ratio in 2001 due to a major decrease in the earnings and a subsequent increase in the interest charges. Thus the company during this year was more vulnerable to increases in the interest payments.
In 2002 we again 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. FY03 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.
FY 05 shows the highest tie ratio by far 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 FY07, due better EBOT 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 FY'07 EPS due to issuance of new shares.
Initially, the 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 by mainly through issuance of new shares. Some dilution effect can be seen in FY07'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 FY01 to Rs 7.5/share in FY07, showing the good return to shareholders as the primary objective of GSK.
The analysis of FY07 reveals a reduction of Rs 413 million in cash position compared to FY06, mainly on the account of increased requirements for working capital and additional stocks required to covering for market requirements for the relocation period of the Penicillin manufacturing facility to the new facility.
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.
This could confuse investors as from the other ratios it can be seen that the company was not very profitable throughout this year however, the ratio shows that the firm has strong growth prospects. In subsequent years we can see that the firm has generally maintained an above average P/E ratio showing that it is less risky than other firms.
FUTURE OUTLOOKWork on new state-of-the-art, penicillin facility was completed and its commercial production started in Q3 of FY07. This will provide higher quality, efficiency and flexibility in manufacturing operations of GSK largest products. FY08 is likely to be challenging, in particular for the pharmaceutical industry of Pakistan. The industry has great potential for growth, however its sustained success depends on a regulatory environment, which is able to balance the interests of the research-based industry, with the need for affordable healthcare.
The process 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 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.
================================================================================================
GSK FINANCIALS
================================================================================================
Income Statement (PKR mn) FY'00 FY'01 FY'02 FY'03 FY'04 FY'05 FY'06 FY'07
------------------------------------------------------------------------------------------------
Net Sales 604 875 6,993 8,101 8,867 9,417 10,088 10,611
Cost of Goods Sold 330 585 4,526 4,941 5,361 5,570 6,222 6,659
Gross Profit 274 290 2,467 3,160 3,506 3,846 3,867 3,952
Selling, General & Admin. Expenses 237 288 1,662 1,577 1,390 1,489 1,712 1,921
Other Income 45 32 172 101 188 350 496 639
Operating Profit / EBIT 82 34 977 1,683 2,304 2,708 2,651 2,670
Interest Expense 1 2 18 9 29 13 19 12
Profit/Loss Before Taxation 74 30 886 1,548 2,119 2,694 2,632 2,659
Tax Expense 23 17 344 522 648 881 967 988
PROFIT/LOSS AFTER TAXATION 51 13 543 1,026 1,471 1,814 1,665 1,671
------------------------------------------------------------------------------------------------
Balance Sheet (PKR mn) FY'00 FY'01 FY'02 FY'03 FY'04 FY'05 FY'06 FY'07
------------------------------------------------------------------------------------------------
Cash and Cash Balances 66 86 1,700 2,246 3,054 3,984 4,666 4,253
Stocks and Spares - 1 47 55 54 53 65 107
Stocks-In-Trade 235 184 1,412 1,605 1,632 1,973 2,195 2,277
Accounts Receivables 36 25 94 72 33 65 85 117
CURRENT ASSETS 387 372 3,628 4,368 4,970 6,519 7,530 7,520
Operating Fixed Assets 102 112 1,214 1,372 1,384 1,320 1,355 1,960
Capital Work in Progress 21 14 182 88 50 184 420 277
Long Term Loans 2 1 49 55 48 40 36 54
Investments - - - - 407 192 96 347
NON-CURRENT ASSETS 142 154 1,459 1,524 1,895 1,741 1,913 2,644
TOTAL ASSETS 529 526 5,086 5,892 6,865 8,261 9,444 10,165
Trade Payables - - - 1,052 954 894 1,598 1,698
CURRENT LIABILITIES 159 144 1,283 1,052 1,092 1,267 1,704 1,761
NON-CURRENT LIABILITIES 42 55 247 257 225 256 203 286
TOTAL LIABILITIES 202 199 1,530 1,309 1,317 1,523 1,907 2,047
Share Capital 45 45 506 728 874 1,092 1,365 1,707
Reserves 255 255 2,854 3,855 4,674 5,646 6,172 6,411
SHAREHOLDERS' EQUITY 327 326 3,557 4,583 5,548 6,738 7,537 8,118
------------------------------------------------------------------------------------------------
PROFITABILITY RATIOS FY'00 FY'01 FY'02 FY'03 FY'04 FY'05 FY'06 FY'07
------------------------------------------------------------------------------------------------
Gross profit margin 45% 33% 35% 39% 40% 41% 38% 37%
Profit Margin 8% 1% 8% 13% 17% 19% 17% 16%
Return on Assets 10% 2% 11% 17% 21% 22% 18% 16%
Return on Equity 16% 4% 15% 22% 27% 27% 22% 21%
------------------------------------------------------------------------------------------------
LIQUIDITY RATIOS FY'00 FY'01 FY'02 FY'03 FY'04 FY'05 FY'06 FY'07
------------------------------------------------------------------------------------------------
Quick ratio 1 1 2 3 3 4 3 3
Current Ratio 2 3 3 4 5 5 4 4
------------------------------------------------------------------------------------------------
ASSET MANAGEMENT RATIOS FY'00 FY'01 FY'02 FY'03 FY'04 FY'05 FY'06 FY'07
------------------------------------------------------------------------------------------------
Inventory Turnover(Days) 140 76 73 71 66 75 78 77
Day Sales Outstanding (Days) 21 10 5 3 1 2 3 4
Operating cycle (Days) 162 86 78 75 68 78 81 81
Total Asset Turnover 1 2 1 1 1 1 1 1
Sales/Equity 2 3 2 2 2 1 1 1
------------------------------------------------------------------------------------------------
DEBT MANAGEMENT RATIOS FY'00 FY'01 FY'02 FY'03 FY'04 FY'05 FY'06 FY'07
------------------------------------------------------------------------------------------------
Debt to Asset 0.38 0.38 0.30 0.22 0.19 0.18 0.20 0.20
Debt to Equity Ratio 0.62 0.61 0.43 0.29 0.24 0.23 0.25 0.25
Times Interest Earned 64 21 55 180 81 204 137 231
Long Term Debt to Equity(%) 13% 17% 7% 6% 4% 4% 3% 4%
------------------------------------------------------------------------------------------------
MARKET VALUE RATIOS FY'00 FY'01 FY'02 FY'03 FY'04 FY'05 FY'06 FY'07
------------------------------------------------------------------------------------------------
Earning per share 11 3 7 14 13 13 12 10
Price/Earnings Ratio 8 26 11 14 13 14 13 20
Dividend per share 5 5 6 7 7 8 8 8
Book value per share 73 73 49 63 51 49 59 44
No of Shares Issued (millions) 5 5 73 73 109 137 137 171
Market prices(Year End) 90 75 85 191 181 186 158 192
================================================================================================