GlaxoSmithKline plc (GSK)
Karolina Lempert
4/15/07
Industry overview
The “consumer” segment of the healthcare sector is not a very strictly defined one. The largest
companies in this segment manufacture and sell a broad range of products that promote wellness
and good health. Some of them focus on the production of drugs, and these are both available over
the counter and by prescription. In fact, unlike the major pharmaceutical companies, “consumer”
healthcare companies tend to be more associated with brands you can come across at your local
convenience store. Some of these medicines may be allergy, cold and flu remedies, pain relievers
or even diabetes medication. Other products sold by consumer healthcare companies range from
common household items to medical devices, such as first aid kits. The range within the
“household items” is huge: baby care, household cleaners, dental care, beauty products, foods, etc.
are all included. One of the most important industry drivers in this particular segment is innovation,
because not only is that especially important in pharmaceutical production, but there is a great deal
of competition in the household item market. Advertising is a key factor as well. After all, most
people do not care about their brand of toilet paper or toothbrush, unless they are convinced to.
Porter’s Five Forces:
 While there are a lot of similar companies and there is easy substitution on the consumer
level, innovative, cheaper drugs will sell without too much rivalry. (opportunity)
 Barriers to Entry in health care very high: high start-up costs, patent protections, significant
product differentiation, long drug development scale. GSK is well-established (opportunity)
 Threat of substitutes in Consumer Healthcare segment only
 Supplier power: not really an issue
 Buyer power of GSK’s customers: Costs paid by insurance plans limit consumer price
sensitivity. The U.S. government is actually the largest consumer of medical supplies
(through Medicare and Medicaid). Such an institution has a great amount of pricing power,
and so this is often out of the company’s control (risk).
Business overview
from Yahoo! Finance
GlaxoSmithKline plc, together with its subsidiaries, engages in the creation, discovery,
development, manufacture, and marketing of pharmaceutical and consumer health-related products.
It operates in two segments, Pharmaceuticals and Consumer Healthcare. The Pharmaceuticals
segment manufactures prescription drugs and vaccines that are used in various therapeutic areas,
including central nervous system, respiratory, anti-viral, anti-bacterial, oncology and emesis,
metabolic, cardiovascular, and urogenital. This segments primary products include Seretide/Advair
for asthma and chronic obstructive pulmonary disease; Avandia group of products for diabetes,
Lamictal for epilepsy and bipolar disorder; Wellbutrin, an anti-depressant; Zofran to prevent nausea
and vomiting associated with chemotherapy and radiotherapy for cancer; Valtrex for herpes; Coreg
for heart disease; Imigran/Imitrex for migraine and cluster headache, and Flixotide/Flovent, an
inhaled steroid for the treatment of inflammation associated with asthma and COPD, as well as
vaccines. The Consumer Healthcare segment offers over-the-counter medicines, oral care, and
nutritional healthcare products. Its principal products comprise Lucozade energy and sports drinks;
Aquafresh and Sensodyne toothpastes and mouthwashes; Panadol, a paracetamol/ acetaminophen
analgesic; and Ribena, a blackcurrant juice-based drink. The company has strategic alliance with
Theravance, Inc. to develop and commercialize novel medicines. GlaxoSmithKline operates in the
United States, Europe, Japan, Asia Pacific, the Middle East, Latin America, Africa, and Canada.
The company was founded in 1935 and is headquartered in Brentford, the United Kingdom.
In the pharmaceutical industry, GlaxoSmithKline is the second leading company in sales, right after
Pfizer. Its global sales come to approximately $18 billion per year, and U.S. sales are responsible
for $9.3 billion. Its most popular drug is Advair, an asthma medication which is the fourth topselling drug in the nation, after Lipitor (Pfizer), Plavix (Sanofi-Aventis), and Nexium
(AstraZeneca). It is one of the world leaders in vaccine development. Their pipeline is significant,
with 158 projects in clinical development at the end of February 2007.
Management
Dr. Jean-Pierre Garnier, 59, CEO:
 Vast amount of experience, especially in OTC drugs
 Worked previously at Schering for 15 years, joined GSK in 2001
 Experience here AND abroad. PhD in pharmacology from University of Louis Pasteur in
France, Fullbright scholar, so he got his MBA from Stanford
Mr. Julian Heslop, 53, CFO
 Less experience with pharmaceuticals and GSK, but he has plenty of financial/accounting
experience
Dr. Moncef Slaoui, 47, Chair of R & D
 Just became chair in June 2006, but has already contributed a lot to the pipeline
 PhD in molecular biology and immunology from Belgium, postdoc at Harvard and Tufts
 Authored over 100 scientific papers
competition
competitor
company description
Johnson &
Johnson (JNJ)
JNJ basically fits into the exact same category as GSK.
Merck (MRK)
Kimberly-Clark
(KC)
Pfizer, Inc.
Johnson & Johnson is responsible for pharmaceuticals (Both
prescription and OTC) as well as medical devices and
consumer brands. Some of its brands include: Tylenol,
Benadryl, Listerine, Neutrogena and Ortho-Evra.
Merck & Co., Inc. (Merck) is a global pharmaceutical
company that discovers, develops, manufactures and markets a
range of products to improve human and animal health. The
Company’s operations consist of two segments: the
Pharmaceutical segment and the Vaccines segment. Major
drugs include: Gardasil, Januvia and Zostavax
Kimberly-Clark’s focus is on consumer brands and a few
medical devices. Some of its brands include: Kleenex, Scott
and Kotex.
Pfizer, Inc. engages in the discovery, development,
manufacture, and marketing of prescription medicines for
humans and animals in the United States, Europe, Canada,
Asia, and Latin America. The Pharmaceutical segment
provides products for cardiovascular and metabolic diseases,
including Lipitor for elevated cholesterol levels in the blood;
Norvasc for hypertension; Caduet for cardiovascular events etc
Financials
Income statement
Total Revenue: 5,959, 000, 000
Gross Profit (ttm):29.07B
implications for GSK
Competition in consumer
brands and OTC drugs –
painkillers, hygiene products
Biggest concern is
competition with Gardasil
once GSK’s HPV vaccine,
Cervarix, is released.
Some consumer brand
competition, but not
significant.
Because it sold its consumer
healthcare segment, it is no
longer a threat there;
however, it puts a lot of
money into R&D so it’s a
major player in the pipeline
race.
Profit Margin (ttm):23.67%
Operating Margin (ttm):33.62%
Operating Margin growth (5 years): 29.9%
Gross Margin: 78.43 (5 year average: 78.24)
R & D growth: from 871 million to 980 million in latest quarter
Profit margin has been increasing, and is higher than the industry’s, so this attests to the company’s
great earnings.
GSK seems to be putting more money in its pipeline this quarter, since there was a substantial
increase compared to the previous quarters.
Operating margin is increasing as well, showing that the company can finance its fixed costs.
Balance sheet
Current ratio: 1.51
Debt to equity: 0.58
Return on equity (Net income/shareholder’s equity): 64.55 (from 40ish average)
Return on assets (Net income/total assets): 20.85
The current ratio indicates that the company can pay its short-term liabilities. I think that it is
comfortably high, but not to the point where the company may be overwhelmed.
Both returns on equity and assets are high.
Cash flows
Operating: 8.59 B
Investing: - 3,171,000,000
Financing: - 4,145,000,000
The company is generating positive cash flow, though it looks like it’s putting a lot of money into
investment lately. GSK seems to be setting up for major expansion.
valuation

Historically, very consistent. Slight drop in 2002-2003. This could be because research
costs were very high in that year. Advair and Wellbutrin, two of Glaxo’s most popular drugs
were released then.
key
GSK
metric
comparison
comparison implications for GSK
to industry
to S&P 500
PE Ratio
15.15
24.70
20.41
PE Ratio
(high- last
5 years)
24.30
44.90
35.63
The P/E ratio is at a very comfortable level. The
stockholder is paying less for GSK’s earnings.
This has been a trend for the past few years.
PE Ratio
(low- last 5
years)
Price to
Sales
PEG Ratio
(5 year
expected)
13.24
16.07
3.53
4.02
1.80
8/31 rank
14.44
2.84

Great earnings

A lot of confidence in the company
It is very slightly lower than the industry’s, which
means its products are in high demand. It has no
difficulty selling its products, though it needs to be
wary.
PEG is among the highest in the industry. The
stock is expensive, because people expect large
future earnings. GSK needs to come through.
investment opportunities

International influence

Huge growth in last year, especially in pharma sector: Fluarix/Flulaval: +60%, Advair: +11%,
Infanrix/Pediarix:+29%, Avandia: +25%

Huge pipeline (breast cancer – including recent FDA approval for Tykerb, bird flu, weight
loss, cervical cancer – recent application for FDA approval), also recently invested $13
Million in a new lab

No huge patent issues, “Son of Advair” is taking shape

Experienced management

Well-established (high barriers to entry)

Valuation (esp. P/E ratio) is favorable
investment risks

specificity of new drugs?

new drugs = side effects and recalls

Potential problems with FDA approval, process of drug manufacturing (risky)
investment recommendation
Buy at current price, with a target price of $67.