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Pharmaceutical: GLAXOSMITHKLINE PAKISTAN LIMITED - Analysis of Financial Statements CY 2004 - CY 2009

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OVERVIEW  : GlaxoSmithKline (GSK) is a world leading research-based pharmaceutical company, engaged in manufacturing and marketing of ethical specialties, other pharmaceutical, animal health and consumer products.

With a powerful combination of skills and resources, it provides a platform for delivering strong growth in today s rapidly changing global healthcare environment. Headquartered in the UK, the company is one of the industry s leading companies with leadership in four major therapeutic areas - antibiotics, central nervous system (CNS), respiratory and gastro-intestinal/metabolic. In addition, it is a leader in the important area of vaccines and also has a growing portfolio of oncology products.






Nature of Business       Pharmaceutical

Ticker                            GLAXO

Net Sales CY  09      Rs 14,719,132,000

Net Sales CY  08      Rs 13,403,224,000

Share price (11-05-10)          Rs 75.9

Market Capitalization    15,636,969,000

GlaxoSmithKline Pakistan Limited came into existence after the merger of Smith Kline and French of Pakistan Limited and Beecham Pakistan (Private) Limited with Glaxo Wellcome Pakistan Limited in 2002. It is listed on the Karachi and Lahore stock exchanges. GSK has a large portfolio of products ranging from tablets to toothpaste to inhalers and complex capsules in over 28,000 different pack sizes and presentations. Nine of its products are amongst the top 15 brands in the country. There are 500 companies in the pharmaceutical sector of Pakistan. In 2009, pharmaceutical market grew by 15%.

In spite of the growth, pharmaceutical industry in
Pakistan is experienced unprecedented challenges. The currency devaluation and inflation, coupled with restrictive pricing, has contributed to declining margins and profitability. Though the government has given some price increases on certain products in the last quarter of the previous year, however, their impact is not broad-based and significant enough to improve the situation.

GSK sells its prescription medicines primarily to wholesale drug distributors, hospitals, government entities and other institutions. These products are dispensed to the public by pharmacies. GSK leads the local industry in value, prescription and volume shares and a substantial size difference over its nearest competitor in the industry. It also exports it good quality products, which make around 2% of GSK s sales. Major export markets include
Afghanistan, Sri Lanka, Syria and Greece. In CY09, the export business grew by 35% and amounted to Rs 390.4 million (CY08: Rs 289.6 million). Major markets included Afghanistan, Sri Lanka and Syria.

Moreover, the percentage increase in exports was accompanied by percentage decrease in gross local sales from 97.8% to 97.4%. However, the overall gross sales increased by 10.03% to Rs 15.059 million in FY09. Net sales in FY09 increased from Rs 13.403 million to Rs 14.718 million showing 9.8% growth, which was much less than net sales growth of 26.3% in FY08.


Over the last nine years, GlaxoSmithKline Pakistan Limited has exhibited consistent growth in sales. FY09 was more or less the same where the net sales increased to Rs 14,719 million. The consumer healthcare business grew by 28.2% to Rs 298.6 million, with Eno and Iodex being the main growth drivers.

Within the core pharmaceutical portfolio, there were strong performances from antibiotics, cardiovascular,

respiratory, dermatology, analgesics and gastro intestinal brands, with all achieving double-digit growth.

Selling, marketing and distribution expenses at Rs 1673.8 million increased by 26.0% in FY09. The increase over last year mainly reflected increased investment in core and new brands and increased freight cost due to rising oil prices and sales growth. On the other hand, administrative expenses increased by 13.2% in FY09 at Rs 588.8 million. Increases in training expenses, employment cost due to inflation, travel and accommodation, legal costs also contributed to expense growth.

Gross margins in FY09 reported at 24.1%, declined by 4.7% compared to the last year. The gross sales decreased by 8% to Rs 3,545 million in FY09. GlaxoSmithKline margins like other pharmaceutical companies have been adversely affected due to the longstanding price freeze on majority of the products since 2001, increases in raw and packaging prices both locally and internationally, the continuous weakening of the rupee against the major currencies, particularly against the US dollar and escalation in fuel, power and utilities costs.

Other operating income was recorded at Rs 436.6 million in FY09 (FY08 Rs 1280 million), primarily comprising of investment income of Rs 354.9 million. Overall, income from other sources declined by 66% to Rs 436 million In FY09. The investment income declined in FY09 can be attributed to reduced funds to payout dividend and increase in cost of doing business. This was partly offset by higher interest rates earned on investments.

Due to other operating income the EBIT has significantly decreased to Rs 1,581 million (CY08: Rs 3077 million) - decrease of 49%. The interest expense for the year amounted to Rs 14 million (CY08: Rs 77 million) - decrease of 81%. Net profit after tax for the year was Rs 933.9 million in FY09 showing decrease by 52%.

The ROA has increased from 18.4% in CY08 to 8.48% in CY08 showing a dismal picture. The ROE has increased from 23.4% in CY08 to 11.52% in CY09. The decrease in ROA and ROE can be attributed to a greater decrease in profit after tax of 52% than the total assets increase at 4% and total equity decrease at 3%. The profit margin has declined from14.59% to 6.35% in CY09 as net sales have increased by 9.8% while profit after tax declined by 52%.

During FY09, capital expenditure was Rs 494.2 million (FY09: Rs 475.0 million) mainly spent on expansion of warehouse, offices, plant upgradation and vehicles. The company has surplus funds of Rs 2,384.1 million in FY09 showing a decline of Rs 340.8 million due to dividend payment and decrease in profitability.

Company s market capitalization has increased over the last 5 years from Rs 15.8 billion in FY08 to Rs 18.6 billion in FY09.

The liquidity position shows an increasing trend till FY05. It has steadily declined thereafter. The current ratio has declined from 4.1 in FY08 to 3.2 in FY09. This is due to an increase of 30% in current liabilities and 2% increase in current assets. The cash and bank balances have declined by 36% for the second consecutive year to Rs 1,739 million which is a source of concern, as this is the most liquid asset of the firm. The bank deposits and prepayments have drastically lowered from Rs 93 million in FY08 to Rs 87 million in FY08.

The accounts receivable in contrast to FY08 which showed massive increase of 770%, decreased by 2% in FY09 signalling ineffective asset management and slow cash conversion cycle. The quick ratio has declined from 2.31 in FY08 to 1.6 in FY09. The quick assets have registered 3% increase. The stock-in-trade have exhibited 16% growth and led to a marginal increase in the current assets. The short-term loans and trade payables combined have increased by 35% to Rs 2,542 million.

The asset management ratios had followed a consistent downward trajectory since 2004 to 2009. The asset management in 2000 showed poor performance and in CY09 the company s liquidity has substantially reduced. The inventory turnover (days) has increased from 94 in FY08 to 99days in FY09. The day sales outstanding (DSO) has decreased from 27 days in FY08 to 24 days in FY09 showing little improvement. The overall operating cycle has increased from 121 days in FY08 to 124 days in FY09.

The DSO has improved primarily due to a steep incline in accounts receivable from Rs 1,017 million in FY08 to Rs 997 million in FY09 - 2% decrease. The stocks-in-trade (inventory) has seen a 16% buildup and now stands at Rs 4,061 million. The company needs to make its credit policies more stringent and curb inventory buildup. The cash balances of the company have been lowered significantly from FY08. This is due to an increase in the operating cycle.

The total asset turnover of the company has shown a negative trend from FY04 to FY09. This decline is due to the fact that the company has been investing in its fixed assets, mainly in plant, machinery and infrastructure upgradation. However, in FY09 the total asset turnover has shown an increase from 1.26 in FY08 to 1.34 in FY09.

The sales/equity ratio also follows the same pattern as that of TATO. Both sales/equity and TATO ratios have plunged in FY07 mainly on account of increased assets base due to investments and capex. The sale to equity has increased from 1.6 in FY08 to 1.82 in FY09.

The debt management ratios of the company have significantly improved over the years. The debt to asset (D/A), debt to equity (D/E) and long term debt to equity (L.D./E) ratios show a visible decline over the years. In FY09, the D/A has slightly increased from 21.4% in FY08 to 26.4% in FY09. The D/E ratio has increased from 27.20% in FY08 to 35.80% in FY09. The L.D./E ratio has slightly increased from 4% to 4.7% in FY09.

The D/E ratio of the company shows an increasing trend since company is taking more debt for capital expansion.

Long-term debt to equity, debt to equity and debt to asset, all the ratios showed an increase due to considerable increase in the level of debt as compared to equity, assets to finance its operation, capital expenditures and to payout dividends.

Looking at the declining long-term debt to equity ratio, we can see that a majority of the credit financing was short term throughout the years. During the initial years a majority of the current liabilities consisted of creditors and accrued expenses however, during the latter years continuing till FY09 it comprises of short-term loans and trade payables, as the company has divested from accrued expenses and other creditors. The falling debt ratio shows that the risk to a current or future investor in the company is decreasing. The company is becoming more financially stable and in a better position to borrow now and in the future, if the need arises.

GSK s TIE ratio shows great variation throughout the years. The TIE ratio substantially increased in FY05 and FY07. These years have seen comparatively higher EBIT relative to interest expense. In FY09, the EBIT amounted to Rs 1,581 million (a decrease of 49%) but the interest expense registered a considerable decrease of 81%. This increased the TIE ratio to 110 in FY08 from 40 in FY08.

In FY02 we see an increase in the company s ability to pay off debts, due to an increase in EBIT because of a major increase in the net sales. In FY01, FY02 and FY03 this ratio was relatively low compared to the subsequent years as the company was in credit with third parties and had accrued expenses along with dividends.

FY03 again shows the greatest deviation by far as the company earned a lot more than the interest payments that were required to be paid. The interest payments in this year decreased significantly as the company divested from creditors and accrued expenses along with dividends and instead only had outstanding financial charges on trade payables.

During FY04 the TIE ratio again dipped due to a high amount of taxation along with trade payables. FY05 shows the high tie ratio which is due to a significant rise in the EBIT because of greater net sales as compared to prior year along with a reduction in the interest charges due to trade payables and taxation however, this huge jump in the tie ratio is because of the rise in net sales. However, in FY06 again TIE nose-dived because of rising interest rates due to SBP s tight monetary stance. But it recovered greatly in FY07, due to better EBIT and lower financial costs.

The earnings per share for GSK are erratic. Initially in FY04 the EPS was high (Rs 13.5) due to a high net income and a relatively low amount of outstanding shares. In FY06, however, there was a great decrease in the EPS (from Rs 13.3 to Rs 12.2) this was due to a drop in the net income of GSK because of high COGS and administrative and other expenses while the total outstanding shares remained constant from the previous year. In subsequent years GSK has continually stabilized its EPS due to greater sales and a relative drop in expenses which have resulted in a higher net income. A dilution can be seen in FY09 EPS due to decrease in Earning Before tax and lower gross margins. The EPS has decreased from Rs 11.5 in FY08 to Rs 5.5 in FY09. This is because the earnings (PAT) shows an decrease of 52% but the number of share outstanding remain unchanged.

Initially investors were willing to pay relatively little for a dollar of GSK s book value however during the recent years the company has turned into a financially strong setup. A major factor of the increase in this book value per share is the continuous increase in its equity base by mainly through issuance of new shares. Despite significant capital expenditure over the years, the overall cash position of the company improved which is evident by the positive trend of DPS. However, In FY09, dividend per share decreased to Rs 5 showing a negative sign for investors.

In 2000, we see that the price/earnings ratio was relatively low which can sometimes poor growth prospects. This was due to a high market price with relatively low EPS. This signified that the firm was risky for investing. A sudden shoot up is seen in 2001 due to a sharp decline in the EPS though there was relatively a decline in the price per share. The P/E ratio has declined from 19.66 in FY08 to 6.63 in CY08. However in FY09, P/E has improved to 20 once again due to increase in GSK price and decrease in earning. The market price of the share in December 09 was Rs 109.3/share (Dec08: Rs 75.9/share) while the EPS was Rs 5.5/share (Dec08: Rs 11.46/ share). The investor expectations are down compared to the last few years. The stock prices are somewhat recovering from recession and trading at the stock exchange is improved in FY09. The stock price trend of the period Sept08 to Sept09 shows that the stock prices have recovered the crisis. The prices peaked in June 2009 to Rs 143.60/share but fell to Rs 99.5/share in Sept09.


In the budget of FY09-10 the customs duty has been reduced from 25 percent and 10 percent to just 5 percent on import of 19 types of raw materials and active ingredients as well as chemicals. The customs duty on import of packaging material like polyacrylate, piston caps, laminated heat sealable paper, kraft paper (wax-coated) non-woven fabric and non-woven paper. This will provide relief to the sector that was grappling with high cost of goods sold with major contributor being raw and packaging material.

Work on new state-of-the-art Penicillin facility was completed and its commercial production started in Q3 of FY07 as expected. This will provide higher quality, efficiency and flexibility in manufacturing operations of GSK largest products. An area for particular focus for GSK is the area of preventive healthcare and vaccines. GSK being the world leading developer and manufacturer of vaccines sees this as a great opportunity to add value to the healthcare situation in the country. The CY08 is likely to be challenging, in particular for the pharmaceutical industry of
Pakistan. The industry has great potential for growth, however its sustained success depends on a regulatory environment which is able to balance the interests of the research based industry, with the need for affordable healthcare.

The process of the pharmaceutical products have been static since 2001 and there has been no offset to account for the adverse impact of rising inflation (particularly in energy and fuel costs), raw and packaging material costs and devaluation. The business improvement initiatives undertaken in past few years by GSK, have contributed towards its the enhanced operational efficiencies and cost savings. However, this beneficial impact is eroding and will continue to do so unless the government implements the existing notified policy of allowing price adjustments to offset inflation and devaluation. This is essential if the industry is to sustain itself for future.

In recent few years,
Pakistan has made some progress in updating its Intellectual Property Rights (IPR) laws to the levels required by global conventions. Practically, much more needs to be done to discourage both piracy and counterfeiting. Its effective implementation will not only protect the consumers, but also the industry and result in quality and research oriented culture. GSK will also continue to focus on introducing innovative medicines developed through its global R&D effort.


Income Statement (PKR mn)          FY 04    FY 05    FY 06    FY 07    FY 08    FY 09


Net Sales                          8,867    9,417   10,088   10,611   13,403   14,719

Cost of Goods Sold                -5,361   -5,570   -6,222   -6,659   -9,548  -11,173

Gross Profit                       3,506    3,846    3,867    3,952    3,856    3,546

Selling, General & Admin Expenses  1,390    1,489    1,712    1,921    2,057    2,401

Other Income                         188      350      496      639    1,280      437

Operating Profit I EBIT            2,304    2,708    2,651    2,670    3,078    1,581

Interest Expense                      29       13       19       12       77       14

Profit/Loss Before Taxation        2,119    2,694    2,632    2,659    3,001    1,567

Tax Expense                          648      881      967      988    1,046      633

PROFIT/LOSS AFTER TAXATION         1,471    1,814    1,665    1,671    1,955      934


Balance Sheet (PKR mn)             FY 04    FY 05    FY 06    FY 07    FY 08    FY 09


Cash and Cash Balances             3,054    3,984    4,666    4,253    2,725    1,739

Stocks and Spares                     54       53       65      107      116      129

Stocks-In-Trade                    1,632    1,973    2,195    2,277    3,495    4,062

Accounts Receivables                  33       65       85      117    1,017      997

CURRENT ASSETS                     4,970    6,519    7,530    7,520    7,971    8,170

Operating Fixed Assets             1,384    1,320    1,355    1,960    2,242    2,343

Capital Work in Progress              50      184      420      277      173      258

Long Term Loans                       48       40       36       54       62       61

Investments                          407      192       96      347      172      169

NON-CURRENT ASSETS                 1,895    1,741    1,913    2,644    2,655    2,838

TOTAL ASSETS                       6,865    8,261    9,444   10,165   10,626   11,008

Trade Payables                       954      894    1,598    1,698    1,867    2,524

CURRENTLIABILITIES                 1,092    1,267    1,704    1,761    1,938    2,524

NON-CURRENT LIABILITIES              225      256      203      286      333      379

TOTAL LIABILITIES                  1,317    1,523    1,907    2,047    2,271    2,904

Share Capital                        874    1,092    1,365    1,707    1,707    1,707

Reserves                           4,674    5,646    6,172    6,411    6,648    6,397

SHAREHOLDERS  EQUITY               5,548    6,738    7,537    8,118    8,355    8,104


PROFITABILITY RATIOS               FY 04    FY 05    FY 06    FY 07    FY 08    FY 09


Gross profit margin                   40%      41       38%      37       29      24%

Profit Margin                         17%      19       17%      16       15       6%

Return on Assets                      21%      22       18%      16       18       8%

Return on Equity                      27%      27       22%      21       23      12%


LIQUIDITY RATIOS                   FY 04    FY 05    FY 06    FY 07    FY 08    FY 09


Quick ratio                            3        4        3        3        2        2

Current Ratio                          5        5        4        4        4        3


AS S ET MANAGEMENT RATIOS          FY 04    FY 05    FY 06    FY 07    FY 08    FY 09


Inventory Turnover (Days)             66       75       78       77       94       99

Day Sales Outstanding (Days)           1        2        3        4       27       24

Operating cycle (Days)                68       78       81       81      121      124

Total Asset Turnover                 1.3      1.1      1.1        1      1.3      1.3

Sales/Equity                         1.6      1.4      1.3      1.3      1.6      1.8


DEBT MANAGEMENT RATIOS             FY 04    FY 05    FY 06    FY 07    FY 08    FY 09


Debt to Asset                        19%      18%      20%      20%      21%      26%

Debt to Equity Ratio                 24%      23%      25%      25%      27%      36%

Times Interest Earned                 81      204      137      231       40      110

Long Term Debt to Equity           4.10%    3.80%    2.70%    3.50%    4.00%    4.70%


MARKET VALUE RATIOS                FY 04    FY 05    FY 06    FY 07    FY 08    FY 09


Earning per share                   13.5     13.3     12.2      9.8     11.5      5.5

Price / Earnings Ratio              13.4       14     12.9     19.7      6.6       20

Dividend per share                     7        8        8      7.5      9.5        5

Book value per share                50.8     49.4     59.5     44.2     47.6       49

No  of Shares Issued (millions)      109      137      137      171      171      171

Market prices (Year End)             181    186.3    157.9    192.4     75.9    109.3

DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].

Courtesy: Business Recorder

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