TOP CONTRIBUTORS

Dan Pan

William Raasch

Shai Bronshtein

GSK AT A GLANCE

P/E ► 27.2   EV/EBITDA ► 17.1   ROA ► 7.9%   ROE ► 30.4%   Debt to Equity ► 3.43   Current Ratio ► 1.56   Interest Coverage Ratio ► 9.46

 

 

 

 

GlaxoSmithKline (NYSE: GSK) is the second largest pharmaceutical company in the world by revenue. It achieved sales of 24.3 billion (British Pound (GBP) in 2008. The company's products include prescription medication, vaccines, and consumer health products, though it manufactures products for many different therapeutic categories even within these spaces. With dozens of potential drugs in the works, the company has a pipeline that includes twice as many late stage drugs as its nearest competitor. While the company will have to deal with major loses in patent protection in the next three to five years, its significant number of new launches should help offset these losses.

GlaxoSmithKline's fortunes are further buoyed by several domestic and global demographic trends. As U.S. baby boomers and the U.S. population in general grow older, one can expect age related illness and the demand for medicines to treat them to increase. Furthermore, as obesity rises worldwide, the demand for effective treatments will continue to grow substantially.

Corporate Overview

GlaxoSmithKline is headquartered in England and employs over 100,000 people in 117 countries. It is the second largest drug manufacturer, in the world and the largest in Europe, by revenue. Its large size allows it to invest large amounts into research and development. After-tax profits in 2008 was GBP 4.7 billion, down from GBP 5.3 billion the year before.

The company, like many of its peers, was formed through the merger of several smaller pharma companies. In 2001 Glaxo Wellcome and SmithKline Beecham, merged to create GSK's current incarnation.

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 Aquafrech (toothpaste). GlaxoSmithKline's prescription products include medications to treat cancer, asthma, malaria, and depression among other maladies.

Source: 2008 GlaxoSmithKline Annual Report^[1]

Business Growth

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.^[2] GSK's pretax profit reached £2.07 billion, which slightly missed analyst targets for the quarter.^[3]

In April 2008, GlaxoSmithKline CEO designate Andrew Witty presented plans detailing a new framework for the company's international business. Witty, who will assume the position of CEO in lat May when Jean-Pierre Garnier officially retires, emphasized a new focus on emerging markets. A new division will be created to focus specifically on emerging markets, an area that has hurt the company's profits in recent quarters. The emerging markets division will focus on operations in Brazil, Russia, India, China and the Middle East. Witty also plans to refine the current team structure for other geographic regions. A new Asian Pacific group will combine many Asian countries (excluding China) with the current group that manages Japan. Canada, the U.S. and Puerto Rico will be combined into the North American division. Witty has also created a new division, the Corporate Strategy and Development team, to focus exclusively on finding new places for expansion. The group's focus will include finding new business opportunities, partnerships and potential acquisitions for GlaxoSmithKline.^[4]

In July 2008, GSK entered into a licensing agreement with Aspen, a South African generics manufacturer. Exact details of the agreement are not available, but it licenses GSK drugs for Aspen to manufacture and includes profit-sharing clauses.^[5] The company has stated that this was part of its effort to expand in the emerging markets, which are forecasted to grow by 13%, or 3 times more than the established Western markets.^[5]

Products and Revenue

Prescription Medication (GBP 20.4 Billion)

Source: 2008 GlaxoSmithKline Annual Report^[6]

The bulk of GlaxoSmithKline’s revenues- 80% in FY'06- 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 4.1 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. ^[7]

• Avandia (GBP 804 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 the first quarter of 2008 fell by 56 percent to $191 million pounds. A major study assessing the risk of the drug will not be complete until 2014.

• Lamictal (GBP 926 million): Within GlaxoSmithKline's central nervous system therapeutic area, Lamictal is the biggest seller. The medication is an established treatment for epilepsy, and has gained significant market share. Lamictal's indication was recently broadened, and it can now be used for bipolar disorder (see Antiepileptic Drug Market and Antipsychotic Drug Market). Each year more people are diagnosed with bipolar disorder. If this trend continues, sales of Lamictal are likely to increase to meet the demand.

Vaccines (GBP 2.5 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.

• GSK is also seeing greatly increased sales of its flu vaccine, Relenza, in the wake of the global Influenza outbreak of 2009. It is just one of two drugs approved for treatment against 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. ^[8]

• 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.^[9][10] Analysts estimate H1N1 vaccine sales to reach $1.44 billion in Q4.^[11] 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.^[12]

Consumer Health Care (GBP 4.0 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.

Lucozade, a line of glucose energy and sports drinks, posted a 10% increase in sales between 2007 and 2008, bringing in GBP 382 million in sales. Increased consumption of energy drinks and "health drinks" could mean even greater increases in sales of Lucozade. GlaxoSmithKline launched the first over the counter weight loss drug alli in June of 2007.

Research and Development

The development process for new drugs is a risky and expensive business. In 2008, GlaxoSmithKline spent GBP 3.51 Billion on research into new treatments and products, nearly 15% 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. As of February 2007, there were 158 vaccine and pharmaceutical products in some stage of clinical development, and 31 products in Phase III (late stage) development. While many of these drugs will ultimately fail, the sheer volume of potential products is higher than many other pharmaceutical companies.

Additionally, several of the products GlaxoSmithKline is developing are in therapeutic areas with high demand. Cervarix, for instance, is a vaccine for human papillomavirus (HPV). Recent studies have linked HPV to cervical cancer. The vaccine would eliminate the potential for getting the virus, reducing the likelihood of developing cervical cancer. The vaccine is currently undergoing clinical trails for a 10 month period which began in Jun. If successful it could be released in early 2008. Cervarix will face competition from Merck (MRK)'s HPV vaccine which is already out, but the market is not saturated so there is space for a new HPV vaccine.

Another vaccine in late clinical trials is H5N1, a pandemic flu vaccine. Success of this product would position GlaxoSmithKline strongly in the flu vaccine market in the case of an influenza outbreak. Novartis AG (NVS) is also working on pandemic flu vaccines, and so GlaxoSmithKline could face competition in this area.

Some other products likely to appear in the next few years include Coreg CR for cardiovascular conditions, Tykerb, a breast cancer treatment, Trexima for migraines, and Allermist to treat allergic rhinitis.

Trends and Forces

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.^[13] 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^[14] 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.^[15]

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.^[16]

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.^[17] 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.^[18]

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.^[19]

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 ^[20]. More recently, the Avian flu of the early 2000s killed at least 200 people around the world, particularly in Southeast Asia. ^[21]. 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.^[22] 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.^[23][24]

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.^[25] Analysts now predict pandemic vaccine sales for GSK to reach about £835 million, or about half of the earlier estimates.^[26]

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 Pfizer's competitors by each drug market (See section on Major Drugs and Industry Trends).

Note that Eli Lilly's net income is negative largely due to its acquisition of ImClone for $6.5 billion in October of 2008.^[27]

References

1. ↑ [1]
2. ↑ Q3 2009 results announcement
3. ↑ Swine flu gives Glaxo a shot in the arm
4. ↑ "Glaxo's New Chief Shuffles Ranks, [www.wsj.com The Wall Street Journal Online], May 1, 2008.
5. ↑ ^{5.0 5.1} GSK enters transformational agreement with Aspen to drive growth in emerging markets.
6. ↑ [2]
7. ↑ Dow Jones. "FDA: Long-Acting Asthma Drugs Boost Asthma Risk." 5 December 2008.
8. ↑ Reuters. "Swine flu a bonus for Glaxo's Relenza flu drug." 22 July 2009
9. ↑ GlaxoSmithKline update: Government orders for pandemic (H1N1) 2009 vaccine
10. ↑ New Glaxo orders point to big flu vaccine windfall
11. ↑ Glaxo takes biggest slice of swine flu market
12. ↑ Limited Swine Flu Vaccine Demand Dents Drug Cos.
13. ↑ Glaxo plans to beat rivals in emerging markets
14. ↑ Glaxo plans to outgrow rivals in emerging markets
15. ↑ 2008 GSK 20-F Annual Report, p. 20
16. ↑ [www.earth.columbia.edu/cgsd/documents/lehman.pdf The Pharmaceutical Industry and the Patent System]
17. ↑ Abbreviated New Drug Application (ANDA): Generics
18. ↑ Trends in FDA Approval of Generic Drugs
19. ↑ 2008 GSK 20-F Annual Report, p. 12
20. ↑ Wikipedia Entry on Spanish Flu
21. ↑ Wikipedia Entry on Avian Flu
22. ↑ GSK’s H1N1 ‘Pandemrix’ vaccine receives positive opinion from European Regulators
23. ↑ GlaxoSmithKline update: Government orders for pandemic (H1N1) 2009 vaccine
24. ↑ New Glaxo orders point to big flu vaccine windfall
25. ↑ Glaxo H1N1 German order cut to 70 pct of original
26. ↑ Limited Swine Flu Vaccine Demand Dents Drug Cos.
27. ↑ Lilly to Acquire ImClone Systems in $6.5 Billion Transaction