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GlaxoSmithKline NYSE: GSK

. . About GSK. Research-based pharmaceutical company headquarted in UK, operations based in US.Also operates in over 100 countries.2 major segments - pharmaceutical and consumer healthcare.. . . Pharmaceuticals. 7% of the world's pharmaceutical market.Medicine targets six major disease areas (

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GlaxoSmithKline NYSE: GSK

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    1. GlaxoSmithKline (NYSE: GSK) Recommended Action: Buy

    2. About GSK Research-based pharmaceutical company headquarted in UK, operations based in US. Also operates in over 100 countries. 2 major segments - pharmaceutical and consumer healthcare.

    3. Pharmaceuticals 7% of the world’s pharmaceutical market. Medicine targets six major disease areas (asthma, virus control, infections, mental health, diabetes, digestive conditions). Leader in vaccines (1/4 of the world’s vaccines), currently developing new treatments for cancer.

    4. Consumer Healthcare Over-the-counter medicines. E.g. Gaviscon, Panadol Oral care. Aquafresh, Sensodyne, Dr Best toothbrushes Nutritional healthcare products. Horlicks, Ribena, Lucozade

    5. Porter’s Five Forces Supplier Power GSK is its own supplier; it invests in R&D to create patentable pharmaceuticals. Patents give them a transient monopoly over their products; in order to allay their expiration, GSK will often slightly modify their drugs to deem them worthy of a new patent. Rivalry Pfizer (PFE), Novartis AG (NVS), Merck (MRK), Schering-Plough (SGP), Sanofi-Aventis (SNY). All (except PFE) have smaller market capitalizations. GSK has the strongest employee base, with an average of 9000 more employees than its major competitors.

    6. Buyer Power Plethora of prescribing doctors and millions of individual patients and customers with little buyer power Nonetheless, state and federal governments often litigate pharmaceutical companies such as GSK on behalf of the consumer Pharmaceutical companies may have to pay hundreds of millions of $ and reduce prices in the future if they are found to be guilty of “defrauding Medicaid,” a charge that has been brought against them for years.

    7. Barriers to Entry Intellectual property well protected (patents); however, will lose patents on 7 of its 10 most successful pharmaceutical products by 2009 GSK has already spread globally and employs over 100,000 people in 117 countries; significant investment required to reach their level i.e. entering companies must focus on growth; GSK is already large and can invest a great deal into R&D instead

    8. Threat of Substitutes For the time being, low; by 2009, though, GSK will lose patents on several products which accounted for 22% of their sales in 2006, allowing generic substitutes to replace them Advair (14% of revenues in FY 2006) will face competition from AstraZeneca’s Symbicort, which will be released this year Similarly, Avandia (7% of revenues in FY 2006) faces competition from Merck’s new oral diabetes drugs

    9. SWOT Analysis Strengths Strong brand recognition; an industry leader Focus on research Leader in vaccines High-quality products Diversification of products Covers WHO’s three priority diseases Global enterprise Humanitarian efforts

    10. Opportunities Continued expansion Growing need/demand for healthcare Rapid technological advancement

    11. Competitor Analysis GSK’s primary competitors are Merck, Pfizer, AstraZeneca, Eli Lilly, and Wyeth. GSK competes with different firms for sales of different types of medication. GSK and Merck are fiercely competing over treatment for HPV. Merck’s Gardasil has been approved for sale by the FDA and is expected to reach $1 billion in sales. GSK is trying to create a cheaper HPV vaccine with Cervarix. GSK’s toughest competition will come from generic drug makers. In fact GSK’s share price decline has resulted from an expected sales decline due to competition from generics. GSK is has launched a $3 billion effort to cut costs.

    12. Standard Valuation Metrics Div & Yield: 2.51 (5.90%) P/E (ttm): 11.59 Market Cap (intraday): 114.62B Price/Book (mrq): 6.08 PEG Ratio (5 yr expected): 4.21 Return on Assets (ttm): 17.46% Return on Equity (ttm): 54.92%

    13. Financial Statements Income Statement Cost of revenue / total revenue = 0.22 Merck 0.25 Operating income = 12.5B - steady growth Balance Sheets Total Assets = 105B (only 4.8B in inventory) Total Liabilities = 37B Long term debt = 9B - steady decline

    14. Discount Cash Flow Main Assumptions: 5% growth rate 30% profit margins 6% discount rate (WACC=4.5%) Mildly conservative on other estimates Calculated value per share = $50.00 Closing price 4/17/08 = $42.66

    15. Summary DCF shows that GSK is currently undervalued (42.66 vs calculated 50) Impressive balance sheet, total assets exceed liabilities substantially. Good investment on a company with good potential for growth.

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