Analysis and interpretations of Glaxo Smithkline Beechem' financial statements - Essay Example

?Analysis and interpretation of companies’ financial ments Glaxo Smithkline Beechem Executive summary This paper has analysed the financial results of Glaxo Smithkline Plc (GSK) which has the hoary past of more than two centuries as a pioneer in drugs manufacturing starting with laxative pills. It is now the sum total of four giants in the field viz Glaxo, Smithkline, Beecham and Welcome groups. The mergers were consolidated at the beginning of the millennium and the last ten year history of the GSK shows a consistent growth and stable existence. The restructuring the company underwent recently reduced its earnings considerably in 2010. However, the current year’s results shows the company’s return to original profitability position and the investment analysts have no hesitation in recommending a ‘buy or hold’ of the company’s shares. Sl No Particulars ............................................................................................................. Page no Executive summary 1 1 Introduction 3 2 Company History 3 3 Beecham 3 4 Smithkline 4 5 Major Highlights for 2011 6 6 Major restructuring programme 7 7 Commentaries 7 8 Conclusion 9 9 Appendices 10 10 References 13 1 Introduction This paper is meant for examining the financial analysis of a UK’s listed company. The company Glaxo Smithkline Plc (GSK) has been chosen for the purpose. The objective of the study is to determine whether the company is good to invest in. The aims to achieve the objective are: 1) Examine the company’s history; 2) Analyse the company’s financial statement for the past five years; 3) Its performance for the year 2010 to decide on its future prospects. 2 Company history Glaxo Welcome and Smithkline Beechem, the four companies whose histories date back to eighteenth century formally merged in 2000 to become GlaxcoSmithKline Plc (GSK). Thus, GSK was incorporated in December 1999 under English Law and shares were listed on the London Stock Exchange and the New York stock exchange. Eventually in December 2000, GSK acquired Glaxo Welcome Plc and Smithkline Beecham Plc (GSK, 2011). The synergy coming from their joining together since the year 2000 has been responsible for their growth ever since till today. 3 Beecham. Thomas Beecham started his laxative pills business in England in 1842 Following its successful business, Beecham started the world’s first factory for manufacture of medicines at St Helens in England in 1859. In 1885, Thomas Beecham’s company became the first to get electricity in the area St Helens two years after the company set up its headquarters at Silver Street and Water Street in 1885. Beecham’s production of laxative pills reached 1 million per day by 1913. In 1945, it became Beecham Group Ltd with the merger of Beecham Pills Ltd and Beecham’s Estates Ltd. In 1972, Beecham’s scientists introduced its research product Amoxicillin, a widely used antibiotic till today in 1972 (GlaxoSmithkline). 4 Smithkline Allen and Handburys Ltd’s predecessor Plough Court Pharmacy was started by Silvanus Beevan in London in 1715. John K Smith started his first drugs store in Philadelphia in 1830 and his brother George joined him in 1841 to form John K Smith & Co which was later joined by Mahlon Kline as a bookkeeper in 1865 to become Smith and Shoemaker. He took additional responsibilities as a salesman and added many large businesses as its customers which resulted in the formation of Smith Kline and Company in 1875 in recognition of Kiline’s contribution to the business. The new company acquired French firm Richards and Company in 1891 garnering in a wide range of consumer brands. In 1929, it was renamed as Smith Kline and French Laboratories to mainly focus on research. In 1950s, the company introduced anti-psychotic drug chlorpromazine which revolutionized treatment of mental illness and became the first generation central nervous system drug. In 1952, the company brought out the time-released drug of dextoamphetamine sulfate (Dexedrine) and used it in Spansule which was novel form of drug delivery. In 1960, it launched the cold remedy Contac as a time-released therapeutic dosage lasting 10-12 hours. In the same period, the company moved into production of animal health medicines by acquiring Norden Laboratories. In 1976, Smithkline corporation introduced the H2 blocker Cimetidine for the treatment of peptic ulcer which was considered a revolutionary treatment for the disease. In 1982, it acquired Allergan which manufactured eye and skin products and also merged with Beckman Instruments dealing with diagnostic and measurement instruments and was renamed as Smithkline Beckman. In 1988, the company acquired one of its largest competitors International Clinical Limited which increased the size of the company by half and becomes Smithkline Bioscience Laboratories and emerged the industry leader. In 1989, Smithkline Beckman and Beecham Group Plc merged to form Smithkline Beecham Plc and in the same year the company introduced B-hepatitis vaccine Engerix, which was a genetically engineered hepatitis B vaccine. In 1993, the company collaborated with Human Genome Science for launching project to identify and describe functions of genes in the human body. Again in 1994, it acquired Diversified Pharmaceutical Services and Sterling which made Smithkline Beecham the third largest OTC company in the world and the single largest in Europe. In order to concentrate in human medicines, the company sold its animal health division in the same year. In 1996, the company focussed on community based health care and started Smithkline Beecham Healthcare Services which combined clinical laboratories, disease management and diversified Pharmaceutical Services businesses. It opened New Frontiers Science Park in 1997 at Harlow, England and also entered into a joint venture with Incyte Pharmaceuticals in the name of diaDexus to make molecular diagnostics with the use of genomics. In 1998, it collaborated with the WHO for elimination of lymphatic filariasis by the year 2020. It divested clinical and diversified pharmaceutical services in order to specialise in pharmaceuticals and consumers’ health care in 1999. In the same year, it introduced Rosiglitazone for treatment of type 2 diabetes (GlaxoSmithkline). Glaxo and Burroughs welcome had their independent growth in the similar fashion and the three big giants joined together to form Glaxo Smithkline (GSK). By this time the type 2 diabetes drug rosiglitazone (Avandia) surpassed one million prescriptions in the US. In the year, the GSK pledged to provide three HIV/AIDS medicines to developing countries at lesser prices. Ever since the formation of GSK, there was no looking back, and every year saw new milestones. Now in 2011, the GSK has announced its move to an environment friendly building in Philadelphia, US. Its subsidised supply of Synflorix at 90 % discount to Kenya enabled vaccination of millions of children against pneumococcal illness. World’s first fluoride toothpaste Sensodyne Repair and Protecvt has been launched The joint venture between GSK and Human Genome Sciences received approval to make Benlysta for the first ever treatment of lupus treatment within 50 years. (GlaxoSmithkline). 5 Major highlights for 2011 The company has maintained the turnover at ? 28.4 bn as in last year although earnings per share have sharply declined to 32.1 p from 109.1 p in last year. R & D expenditure was at 14 % of the company’s total sales. There has been 20 % growth in the sale of Horlicks in India, Sensodyne tooth paste has been the fastest growing toothpaste brand during the last five years, 1.4 bn doses of vaccines have been supplied to 179 countries and 24 % of the sales turnover comes from emerging markets excluding USA, Western Europe, Canada, Japan, Australia and New Zealand. As a global company, it employs over 96,500 and commands 5 % share of world market. Its business model has been “a balanced synergistic business with multiple growth drivers supporting a core pharmaceutical operation”. Vaccines for Malaria at the stage of phase III trials are ongoing in 7 African countries. It has been planned to supply 300 m doses of Synflorix, the vaccination for pneumococcal illness at a reduced price during the next decade to the developing countries in continuation of the supply of the vaccine to Kenya in the past. It has committed to treat school age children in Africa with the risk of intestinal worms. As a leader, GSK has ranked first in Access to Medicine Indexes for the years 2008 and 2010. The year 2050 has been set as a target date for “value chain, from raw material to product disposal, to be carbon neutral”. The company claims to have reduced its net debt by ? 0.6 bn despite increase in legal settlements resulting in a cash outflow of ? 2 billion and funding the returns to shareholders. The net cash inflow before legal settlements was ? 8.8 billion. As GSK remains financially very robust, the dividend was increased by 7 % to 65 p per share consistent with increased dividends each year since 2005 averaging to 8 % growth during the last five year period. It has also planned buy-back programme ? 1-2 billion in 2011 which will result in increased returns to shareholders (GSK, 2011). 6 Major restructuring programme The company reports that sequel to its major restructuring programme initiated in 2007, there have been adverse effect on earnings at ? 1,108 in 2010, ? 614 in 2009, ? 839 in 2008 all on profit after taxation. But for these, earning per share would have been 53.9 p, 121.2 p and 104.7 p for 2010, 2009 and 2008 respectively. The earnings for 2010 reduced by half is attributed to nearly double the restructuring expenses in 2010. Weighted average number of shares in issue are shown 5,128 millions in 2010, 5,108 in 2009 and 5,226 in 2008 (GSK, 2011). 7 Commentaries Key Stats and ratios 2010 (%) 2009 (%) 2008 (%) 2007 (%) 2006 ( %) Net Profit Margin (after tax) 6.53 19.98 19.35 23.37 23.67 Operating Margin 13.32 29.70 29.32 33.43 33.61 EBITD Margin Return on total assets 4.39 13.23 11.96 17.13 21.52 Return on total equity 19.01 52.77 56.65 53.59 56.99 As against the above, Q3( 2011) results show 20.31 %, 29.76 %, 13.87 %, 68.56 % of Net profit margin, Operating margin, Return on average assets and return on average equity respectively (GoogleFinance, 2011). GSK’s major competitors are Pfizer Inc, Novartis AG (ADR), Astra Zenca Plc (ADR), Merck & Co, Inc, Teva Pharmaceutical Inc, Sanofi SA (ADR), Abbott Laboratories, Johnson & Johnson and Roche Holding Ltd (ADR). While GSK Plc’s price change is +10.50, the prices of others are less than 1 % and even negative figures as per today’s real time position. (GoogleFinance, 2011). The above results show that GSK has returned to its pre-2010 position after the negative impact due to major restructuring in 2010. This is evident of the company’s strong financials. In view of the above price positions, analysts’ recommendations are ‘strong buy and hold’ consistently for the last three months with recommendation to sell at all (MSNMoney, 2011). MSN Money’s summary for the past ten years is shown below Appendix. (MSNMoney, 2011) 2010 2009 2008 2007 2006 Current Ratio 1.253 1.45 1.76 1.317 1.513 Quick Ratio 0.95 1.11 1.355 1.02 1.18 Turnover/Total Assets Ratio 0.67 0.66 0.62 0.73 0.91 Turnover/Fixed Assets Ratio 1.08 1.12 1.10 1.31 1.60 Total Debt/Total Assets Ratio 0.77 0.75 0.79 0.68 0.62 Total Debt/Total Equity Ratio 3.33 2.99 3.74 2.13 1.65 Profitability Ratios Operating Profit Margin 13.32 29.70 29.32 33.43 33.61 Net Profit Margin 6.53 19.98 19.35 23.37 23.67 Operating Return on Assets 8.96% 19.66% 18.13% 24.49% 30.05% Return on Total Assets 4.39% 13.23% 11.96% 17.13% 21.52% Return on Equity 19.01% 52.77% 56.65% 53.59% 56.99% The current ratios of GSK have all along been above 1 % which is a healthy trend of the company’s ability to meet its current liabilities without difficulty. The quick ratios sans inventory also show a better liquidity position in meeting its current liabilities without having to depend on its inventories to be converted into cash for payment of its current liabilities. Both these ratio show a healthier trend for the five year period of analysis despite major restructuring it underwent in the meanwhile. The five year analysis shows the relative efficiency of the company’s assets to produce sales. Debt equity ratio has increased from 1.65 to 3.33 in 2010. The total turnover/assets ratio indicates company’s efficiency of making sales in terms per sterling production of sales. The analysis shows that it requires less than one pound sterling of assets to produce one pound sterling of sales. Fixed assets include not only property, plant and machinery but also intangibles like good will and intellectual property rights apart from other noncurrent assets. While goodwill has increased from pound sterling 758 in 2006 to 3606 in 2010, sales turnover has not increased proportionately. It has only increased by 22 % in the year 2010. It is noteworthy that plant and machinery only has increased from ? 6,930 in 2006 to ? 9045 in 2010. The increase is around 30 % which is quite comparable to the increase in the sales turnover. Further, the intangibles other than goodwill are quite sizeable representing cost of acquisition of brands which have long period of life and have therefore been capitalised. If it had been charged to profit and loss account, it would have reduced the profit considerably. IAS 38 allows capitalisation of brand costs except those internally generated. Total debt to total assets ration have remained at the same levels without wide fluctuations during the five year period. And invariably debt remains less than assets level indicating the company’s control over its debts. Please see appendices 1 and 2 below. 8 Conclusion The GSK has been built up over the three centuries and it has now started benefiting from the synergies of four giants merged together. They have many firsts to their credit. The mergers have eliminated wasteful competition among them and enabled them to maximise their earnings. The shareholders have been receiving dividends consistently. The investment analysts have rightly recommended to 'buy or hold' the company’s shares. 9 Appendices Appendix 1 Common-size income statement Particulars 2010 2009 2008 2007 2006 Turnover 28,392 28,368 24,352 22,716 23,225 Cost of Sales 7,592 7,380 6,415 5,317 5,010 Gross Profit 20,800 20,988 17,937 17,399 18,215 Selling, general & administration 13,053 9,592 7,656 6,954 7,257 Research and development 4,457 4,106 3,681 3,327 3,457 Other operating income 493 1,135 541 475 307 Operating profit 3,783 8,425 7,141 7,593 7,808 Finance income 116 70 313 262 287 Finance costs 831 783 843 453 352 Share of after tax profits of associates 81 64 48 50 56 Profit on disposal interest in associates 8 115 0 0 0 Profit before taxation 3,157 7,891 6,659 7,452 7,799 Taxation 1,304 2,222 1,947 2,142 2,301 Profit after taxation for the year 1,853 5,669 4,712 5,310 5, 498 Profit attributable to minority interests 219 138 110 96 109 Profit attributable to share holders 1,634 5,531 4,602 5,214 5,389 1,853 5,669 4712 5,310 5,498 Basic earnings per share (pence) 32.1 p 109.1p 88.6 p 94.4 p 95.5 p Diluted earnings per share (pence) 31.9 p 108.2p 88.1 p 93.7 p 94.5 p Common-size Balance sheet Particulars 2010 2009 2008 2007 2006 Non-Current Assets Property Plant & Machinery 9.045 9,374 9,678 7,821 6,930 Goodwill 3,606 3,361 2,101 1,370 758 Other intangible assets 8,532 8,183 5,869 4,456 3,293 Investments in associates & Joint ventures 1.081 895 552 329 295 Other investments 711 454 478 517 441 Deferred Tax Assets 2,566 2,374 2,760 2,196 2,123 Other non-current assets 556 583 579 687 608 Derivative financial instruments 97 68 107 1 113 Total non-current assets 26,194 25,292 22,124 17,377 14,561 Current Assets Inventories 3,837 4,064 4,056 3,062 2,437 Current tax recoverable 56 58 76 58 186 Trade and other receivables 5,793 6,492 6,265 5,495 5,237 Liquid Investments 184 268 391 1,153 1,035 Derivative financial instruments 93 129 856 475 80 Cash and cash equivalents 6,057 6,545 5,623 3,379 2,005 Assets held for sale 16 14 2 4 12 Total current assets 16,036 17,570 17,629 13,626 10,992 Total Assets 42,230 42,862 39,393 31,003 25,553 Current Liabilities Short term borrowings 291 1,471 956 3,504 718 Trade and other payables 6,888 6,772 6,075 4,861 4,831 Current tax payable 1,047 1,451 780 826 621 Derivative financial instruments 188 168 752 262 40 Short-term provisions 4,380 2,256 1,454 892 1,055 Total current liabilities 12,794 12,118 10,017 10,345 7,265 Non-current liabilities Long-term borrowings 14,809 14,786 15,231 7.067 4,772 Deferred tax provision 707 645 714 887 595 Pensions and other post employment benefits 2,672 2,981 3,039 1,383 2,339 Other provisions 904 985 1,645 1.035 528 Other non-current liabilities 594 605 427 368 346 Derivative financial instruments 5 0 2 8 60 Total non-current liabilities 19,691 20,002 21,058 10,748 8,640 Total liabilities 32,485 32,120 31,075 21,093 15,905 Net Assets 9,745 10,742 8,318 9,910 9,648 Equity Share Capital 1,418 1,416 1,415 1,503 1,498 Share Premium Account 1,428 1,368 1,326 1,266 858 Retained Earnings 4,779 6,321 4,622 6,475 6,965 Other reserves 1,262 900 568 359 65 Shareholders’ equity 8,887 10,005 7,931 9,603 9,386 Minority interests 858 737 387 307 262 Total equity 9,745 10,742 8,318 9,910 9,648 Appendix 2 MSN Money’s summary for the past ten years is shown below. (MSNMoney, 2011) Income Statement - 10 Year Summary (in Millions)   SALES EBIT DEPRECIATION TOTAL NET INCOME EPS TAX RATE (%) 12/10 28,392.0 3,157.0 1,679.0 1,634.0 0.32 41.31 12/09 28,368.0 7,891.0 1,562.0 5,531.0 1.08 28.16 12/08 24,352.0 6,659.0 1,231.0 4,602.0 0.88 29.24 12/07 22,716.0 7,452.0 1,022.0 5,214.0 0.94 28.74 12/06 23,225.0 7,799.0 958.0 5,389.0 0.95 29.5 12/05 21,660.0 6,732.0 904.0 4,689.0 0.82 28.46 12/04 19,986.0 5,779.0 859.0 2,732.0 0.48 30.4 12/03 21,070.0 5,959.0 831.0 2,420.0 0.42 27.71 12/02 21,212.0 5,524.0 836.0 433.0 0.07 26.5 12/01 20,489.0 4,517.0 811.0 -109.0 -0.02 29.51 Balance Sheet - 10 Year Summary (in Millions)   CURRENT ASSETS CURRENT LIABILITIES LONG TERM DEBT SHARES OUTSTANDING 12/10 42,230.0 33,343.0 14,809.0 5.1 Bil 12/09 42,862.0 32,857.0 14,786.0 5.1 Bil 12/08 39,393.0 31,462.0 15,231.0 5.1 Bil 12/07 31,003.0 21,400.0 7,067.0 6.0 Bil 12/06 25,553.0 16,167.0 4,772.0 5.8 Bil 12/05 27,198.0 19,887.0 5,271.0 5.7 Bil 12/04 22,944.0 17,221.0 4,381.0 5.7 Bil 12/03 21,200.0 16,141.0 3,651.0 5.9 Bil 12/02 22,327.0 15,746.0 3,092.0 6.0 Bil 12/01 22,343.0 14,953.0 2,108.0 6.2 Bil Financial data in British Pounds  (MSNMoney, 2011). 10 References GlaxoSmithkline. (n.d.). Our History. Retrieved Nov p, 2011, from http://www.gsk.com/about/history-noflash.htm# GoogleFinance. (2011). Glaxo Smithkline Plc (ADR) (Public, NYSE :GSK). Retrieved Nov 8, 2011, from http://www.google.com/finance?cid=14456 GSK. (2011). GSK Annual Report 2010. Retrieved Nov 8, 2011, from http://www.gsk.com/investors/reps10/GSK-Annual-Report-2010.pdf MSNMoney. (2011). Glaxosmithkline ADR Representing 2 Ord Shs (NYSE: GSK). Retrieved Nov 8, 2011, from Analysts Ratings : http://investing.money.msn.com/investments/analyst-ratings?symbol=GSK Read More