GlaxoSmithKline as the Second Largest Company in the Pharmaceutical Industry - Essay Example

Share Price Analysis GlaxoSmithKline Plc. GlaxoSmithKline (GSK) Plc is regarded as the second largest company in the pharmaceutical industry with regard to sales revenue (GlaxoSmithKline plc.,, “Explore GSK”). The company aims at selling prescription based medicines and vaccines and consumer care products. It also manufactures many therapeutic products and sells them all over the world. The reason behind choosing GSK for this particular essay pertains to the fact that it is one of the largest companies in pharmaceutical industry, whose market capitalization is notable and competitive in nature. In 2013, the company issued about 4850 million of shares in the public and earned market capitalization of £69,178.56 million. The company occupies about 5% of markets share in this particular market globally with respect to sales revenue. GSK is listed in FTSE 100, FTSE 350 and FTSE All-Share (GlaxoSmithKline plc.,, “Explore GSK”). The share price performance of GSK has encountered huge fluctuation over the years due to the slide in profit. By considering the performance of FTSE 100, GSK has performed quite well over the period of 10 years. However, there are many controversies and events, which had forced the sales revenue of the company to decline. As per July 23, 2014, the share price of GSK had dropped 4.7% and this drop is the steepest as compared to October 2008. Despite the decrease in share price, the company has anticipated growth of 4% to 8% (MarketWatch, “Glaxosmithkline Lowers Full-Year Profit Outlook”). This decrease in share price did not de-motivate the investors and they kept on investing in the shares of the company as it shared a good reputation in the market. GSK is the best company for share price analysis as the fluctuations is very interesting to examine and the reason behind the same are practical in the present competitive world (MarketWatch, “Glaxo Slides in London After Earnings Warning”). Share price performance of GSK over the last 12 months (Table) along with news and events The share price of GSK is observed to drop by 3% in the second quarter of 2014. This is because of the decrease in profit from the first quarter of 2014. However, the company has also reported that the operating profit for the second quarter of 2014 has slumped by 25% and the turnover decreased by 13%. The decrease in this company financials have affected the Earning per share (EPS), which have dropped by 25% from the previous year’s performance (Guardian News and Media Limited, “FTSE Ends Week On A Low Note, While Glaxosmithkline Suggested As Pfizer Target”). The company stated that there have been drastic changes in strategies of the company, which have affected its performance adversely instead of improving the situation in the first half of 2014. During the first half of 2014, GSK has to deal with Novartis pertaining to completion of a contract; to fulfil that contract GSK devised a number of strategies, which was not successful and ended up in reducing the turnover. The escalating competition in pharmaceutical market in the United States as well as worldwide has challenged the sales of the company. The sales of vaccines and pharmaceutical products had declined by 4%, which was the main cornerstone of the company. The decline of sales in Japan was 10%, which was one of the strongest markets in the whole world. The sales in European countries remained constant without much fluctuation. The turnover of new segment of GSK, Glaxo Consumer Healthcare, dropped by 4% due to the continuous interruption in supply of products in both Europe and the US (Al Jazeera America, LLC, “China Charges Investigators Linked To Glaxosmithkline Bribery Scandal”). However, the company has reported that the supply condition in these two countries is improving with the passage of time. Thus, sales in consumer healthcare section of the company are expected to remain flat in 2014. The company has announced that the opportunities in the pharma market are considerable enough to bring success to the company. It has outlined that there are 40 new molecular entities, which are at the last stage of development. These entities have the potential to get accepted by the medical board globally. This molecule has the ability to occupy first class in therapeutic areas like immune-inflammation, respiratory and cardiovascular. GSK reported that the repurchases of shares for the remaining period of 2014 remains immaterial, because of the impact of present decrease in value of Sterling on free cash flow. The above mentioned events have affected the share price of the company and there is huge fluctuation over the period of one year from 1st July, 2014 to 31st July, 2014. However, it is observed that the share price of GSK has improved by 0.85% than others companies in FTSE 100 Index. The company also predicts to increase the share price 36% over one year time (Al Jazeera America, LLC, “China Charges Investigators Linked To Glaxosmithkline Bribery Scandal”). The following table highlights the performance of share price of GSK over the last one year from 1st July, 2014 to 31st July, 2014 (Yahoo! Inc., “Historical Prices”). Date Close (in £) Average Volume 1-Jul-14 1,436.50 9,343,400 2-Jun-14 1,564.00 7,505,400 1-May-14 1,601.00 6,920,300 1-Apr-14 1,632.00 9,549,500 3-Mar-14 1,591.50 7,160,400 3-Feb-14 1,671.50 8,391,200 1-Jan-14 1,564.00 6,159,600 2-Dec-13 1,611.50 4,641,500 1-Nov-13 1,618.50 5,807,600 1-Oct-13 1,643.50 7,695,000 2-Sep-13 1,557.50 7,406,200 1-Aug-13 1,645.50 5,265,600 1-Jul-13 1,684.00 5,694,400 From the above table, it can be stated that the share price performance of GSK has fluctuated drastically over this period of one year mainly due to the afore mentioned reasons. For the past one year the share price of the company has fluctuated within the boundary of £1436 - £1684. The events that followed one after another affected the sales revenue of the company which is reflected in decreasing shares price. The share price of GSK in July 2013 was £1684 and thereafter the price is observed to decrease in one year to £1,436.50 in July 2014 (Yahoo! Inc., “Historical Prices”). The reason behind this slump can be explained through an event that changed the sale figures of the company totally and also disturbed its stable share price performance. During September 2013, the famous drug maker was accused of involving systemic bribery, which took place outside its control. It was revealed that the manager of GSK in China was involved in bribery. In July, 2013, a Chinese sales executive of the company was arrested for bribing about £ 320 million to officials and doctors for clinching higher prices and penetrating greater part of Chinese market (Roland, “Chinese Police Accuse GSK Of Systemic Bribery”; Petroff, “Could China scandal derail Glaxo?”; GlaxoSmithKline Plc., “Historical Prices”). The company had stated that the personal investigation had revealed the wrong doings by its sales staffs; however, they strongly reported that these sales staffs worked outside the control system of GSK. In the mean time, the probe undertaken by Chinese police indicated that the whole situation was framed by GSK China and it was not an individual act. Nevertheless, the company was reluctant to take the blame and pointed that the wrong doings were encouraged by the sales personnel and not by the company (Roland, “Chinese Police Accuse GSK of Systemic Bribery”). After this incident, the company encountered a number of investigations, which indicated the unethical practices again and again. However, the company encountered the same allegation in Jordan, Iraq and Lebanon (Damodaran, Investment valuation, 16). These incidents challenged the image of the company and during August and September, 2013 the share price of the company decreased with the decline in sales (Holmes, Sugden & Gee, Interpreting Company Reports and Accounts, 13). Nevertheless, the company officials dealt the situation strategically so as to revive its sales in October, 2013. As the medicines and drugs of the company saves life of million every day, the customers and investors could not make a decision to avoid the products of GSK. Thereafter the sales revenue and the share price revived its position or increased considerably with the increase in average volume of shares issued (The New Economy, “GlaxoSmithKline bribery case now investigated in the UK”). Comparing the share price movement of GSK with FTSE 100 FTSE 100 Index is referred as the share index, where 100 companies with highest market capitalization are listed on London Stock Exchange. It measures the prosperity of a business, which are regulated by the UK Company Law. GSK is one of the 100 companies, and it possesses the highest market capitalization with a minimum issue of 9,549,500 shares in a month (GlaxoSmithKline Plc., “Historical Prices”). The graph provided below highlights the difference in percentage change of share price of GSK and other FTSE companies during the period from August 2013 to August 2014. Figure 1: GSK Vs FTSE 100 (Yahoo! Inc., “Basic Chart”) From the above figure, it can be stated that the change in share price of GSK has been negative as compared to FTSE 100. This underlines the fact that GSK has encountered decrease in profit, which has lead to slump in share price. It is observed that FTSE 100 finished its trade in July, 2014 with 2.8 points higher than that of June 2014. The markets for FTSE 100 companies the market has recovered to great extent, but fir GSK the condition worsened with the passage of time in July 2014. The company reported that it has encountered a decline of 22% in operating profit at the end of first quarter of 2014 and have also declared the fact that as a result of the decline the EPS will remain flat for the whole year. Adding to the controversies related bribery case, the company also encountered the challenge of stronger pound. Apart from that, the decreasing sale of vaccines and drugs in the United States due to the presence of generic products, had forced the company to recover its sales and market capitalization as soon as possible (HeraldScotland, “GSK Profits Warning Curbs FTSE 100 Rally”). Graphical representation of share price movement (1 year) The share price movement of the company is recorded for the past one year. The fluctuations are observed to be severe as it affected the market capitalization. Figure 2: Share price movement of GSK (1 year) (Yahoo! Inc., “GSK”) The graph presented above elaborates the fact that the share price movement has been drastic over the period because of the variations in sales. The sales slumped due to number of reasons which are depicted above. If the one year period is considered it is observed that share price decreased the highest during September 2013. The reason behind the decline can be marked by the series of controversies that are encountered by the company in China, Poland and Jordan. The company is forced to reduce the share price as the sales declined to a great extent due to the above mentioned reasons. However, the company tried to regain its position in the market after it encountered a decline in sales in the United Kingdom (UK) and United States (US). The generic products replaced the vaccines and drugs manufactured by the company as a result the company lost its market share to a great extent. The highest volume of shares was transacted during April – May 2014 when the investors preferred to buy a huge amount of shares as the price of share was low. Presently, in August 2014, the share price is low as compared to the previous years. Investment of £10000 If any investor could have invested, an amount of £10000, in the company shares in July 2013 i.e. one year ago, he/she has to buy the shares at £ 1,684.00. However, the share price has declined to £ 1,436.00, which indicates the fact that the number of shares obtained will be reduced. The following table elaborates the calculation pertaining to number of shares obtained from the trade in July 2013 and July 2014. Shares obtained Amount invested £ 10,000.00 Share price in July 2013 £ 1,684.00 No. of share obtained 5.94 Share price in July 2014 £ 1,436.00 No. of share obtained 6.96 From the above table it is evident that the decrease in share price has helped the investor to buy more shares in July 2014 than in July 2013. This indicates the fact that the decrease in share price does not affect the investors. However, the investors are affected by the decrease in amount of dividend which is the consequence of reduced sales. Reference List Al Jazeera America, LLC.. 2013. China Charges Investigators Linked To Glaxosmithkline Bribery Scandal. < http://america.aljazeera.com/articles/2014/7/14/glaxosmithkline-chinatrial.html > Damodaran, A. Investment valuation. (New Jersey: John Wiley & Sons, 2012). GlaxoSmithKline plc., 2014a. Explore GSK. < http://www.gsk.com/explore-gsk.html > GlaxoSmithKline plc., 2014b. Detailed Share Price. < http://www.gsk.com/investors/share-price-analysis/detailed-share-price.html > Guardian News and Media Limited, 2014. FTSE Ends Week on a Low Note, While Glaxosmithkline Suggested As Pfizer Target. < http://www.theguardian.com/business/marketforceslive/2014/aug/01/ftse-falls-glaxosmithkline-suggested-pfizer-bid > HeraldScotland, 2014. GSK Profits Warning Curbs FTSE 100 Rally. < http://www.heraldscotland.com/business/markets-economy/gsk-profits-warning-curbs-ftse-100-rally.24838753 > Holmes, G., Sugden, A. & Gee, P. Interpreting Company Reports And Accounts. (New York: Prentice Hall, 2008). MarketWatch, 2014a. Glaxosmithkline Lowers Full-Year Profit Outlook. < http://www.marketwatch.com/story/glaxosmithkline-lowers-full-year-profit-outlook-2014-07-23 > MarketWatch, 2014b. Glaxo Slides In London After Earnings Warning. < http://www.marketwatch.com/story/uk-stocks-slip-ahead-of-boe-minutes-bhp-gains-2014-07-23 > Petroff, A., 2013. Could China scandal derail Glaxo? < http://money.cnn.com/2013/07/17/investing/gsk-china-risks/ > Roland, D., 2013. Chinese Police Accuse GSK Of Systemic Bribery. < http://www.telegraph.co.uk/finance/newsbysector/pharmaceuticalsandchemicals/10282547/Chinese-police-accuse-GSK-of-systemic-bribery.html > The New Economy, 2014. GlaxoSmithKline bribery case now investigated in the UK. < http://www.theneweconomy.com/business/glaxosmithkline-bribery-case-now-investigated-in-the-uk > Yahoo! Inc., 2014. Basic Chart. < https://uk.finance.yahoo.com/q/bc?t=1y&s=GSK.L&l=on&z=l&q=l&c=&ql=1&c=%5EFTSE > Yahoo! Inc., 2014. GSK.< https://uk.finance.yahoo.com/q/bc?s=GSK.L > Yahoo! Inc., 2014. Historical Prices. < http://finance.yahoo.com/q/hp?s=GSK.L&a=06&b=1&c=2013&d=06&e=31&f=2014&g=m > Read More