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Macroeconomic Analysis of GlaxoSmithKline plc. Brief Company Background GlaxoSmithKline plc (henceforth GSK) is a London-based, “science-led global healthcare company that researches and develops” products in three primary areas, namely Pharmaceuticals, Vaccines and Consumer Healthcare. For 2011, the company generates annual turnover of ₤27.4 billion, 68% of which was from Pharmaceuticals, 13% from Vaccines, and 19% from Consumer Healthcare. Pharmaceuticals makes available innovative, patent-protected medicines under established brand names. Its vaccines business is one of the largest in the world, and its consumer health products include over-the-counter medicines, oral healthcare and nutritional health care (GSK Form 20-F, 2011).

Demand and supply factors that affect the sales and the profitability of GSK There are a number of demand and supply factors which impact of GSK sales. Primary among them is the successful development of patent-protected medicines to reach market stage. When the medicines address those diseases for which there is the greatest human need, in particular cancer, cardiovascular diseases and HIV/AIDS. Medicines account for up to 60% of increases in survival rates for cancer since 1975. Deaths due to cardiovascular diseases dropped 28% from 1997 to 2007, and the AIDS death rate has fallen 75% since 1995 (PhRMA, 2011).

From 2006 to 2010, investment in personalized medicine (PM) grew by 73%, and investment in PM is expected to grow further by another 53% (see figure following). Source: 2011 Profile, Pharmaceutical Industry, p. 2 That demand exists is apparent, and there is little threat on the supply side for patented-protected medicines. Patents last for 20 years, after which the protection is lifted and a new supply factor is added – that of the generic drug producers, who do not undertake research on their own but manufacture those drugs no longer under patent.

At this juncture, prices for drugs suddenly drop, and if the high cost of R&D has not been recovered by then, the company loses. Market structure of the global pharmaceutical industry The structure of the market is determined by the market players; data for GSK’s direct competitors are shown in the table below (Source of the market data are from Reuters, through YahooFinance. com. ) Direct Competitor Comparison   GSK MRK NVS PFE Industry Market Cap: 112.98B 123.27B 132.77B 169.31B 1.40B Employees: 97,389 86,000 124,000 102,500 1.70K Qtrly Rev Growth (yoy): 0.01 0.01 -0.02 -0.07 0.11 Revenue (ttm): 42.91B 48.20B 59.07B 66.33B 2.13B Gross Margin (ttm): 0.74 0.66 0.69 0.79 0.55 EBITDA (ttm): 15.57B 17.55B 17.05B 27.41B 124.00M Operating Margin (ttm): 0.31 0.22 0.21 0.29 0.12 Net Income (ttm): 7.91B 6.95B 8.65B 8.28B N/A EPS (ttm): 3.12 2.24 3.55 1.23 1.12 P/E (ttm): 14.59 18.09 15.46 18.34 15.32 PEG (5 yr expected): 2.01 2.71 2.61 4.20 0.92 P/S (ttm): 2.68 2.53 2.23 2.53 2.14   MRK = Merck & Co.

Inc. NVS = Novartis AG PFE = Pfizer Inc. Industry = Drug Manufacturers – Major *ttm – trailing twelve months, from 27 June 2012 While GSK lags behind in revenues and market capitalisation, it does have a comparatively strong net income, and exceeds its competitors in operating margin and earnings per share. This means that GSK is able to lower its operating costs and has more efficient cost management than its rivals.

Because of greater operating efficiency, the company is more defensive and can better withstand fluctuations in inflation (Datamonitor, 2011). Furthermore, threats of business cycle volatilities due to the 20-year patent limit are reduced by GSK’s entry into the generic drug manufacturing, as shown in the following table against its competitors, led by Watson. Generic Drugmakers Ranked by Sales   Company Symbol Price Change Market Cap P/E Watson Pharmaceuticals, Inc. WPI 71.32 0.00 9.09B 33.52 Mylan, Inc. MYL 20.95 0.01 8.98B 16.22 Pfizer Inc. PFE 22.61 0.01 169.31B 18.34 Johnson & Johnson JNJ 66.84 0.01 183.57B 18.33 GlaxoSmithKline plc GSK 45.54 -0.01 112.98B 14.59 Sanofi SNY 36.09 0.00 95.55B 12.19 Novartis AG NVS 54.81 0.01 132.77B 15.46 Roche Holding AG RHHBY 42.37 -0.00 143.63B 14.83 AstraZeneca PLC AZN 43.75 0.01 55.74B 6.71   Strategies the company can take to sustain operations in a profitable market environment GSK is faced with market contraction in developed countries due to the slow recovery from the economic recession.

There is reduced demand from governments which have switched to generic drugs. Thus, the company should pursue the following strategies: 1. Enter into emerging markets. China, India, Argentina, and Southeast Asia have strong demand for pharmaceuticals, and opening production centres there may lower production costs (PhARMA, 2011, p. 6). Furthermore, emerging markets were largely spared by the last crisis (Datamonitor, 2011). 2. Continue research and development into new pharmaceuticals and establish new patents. It takes 10-15 years from concept to market in biotechnology R&D (p. 2).

The faster GSK can patent its new drugs, the more it can secure its future revenues. 3. Collaborate further with smaller research biotech companies to reduce research risk. Many small biotech companies lack capital to pursue their research; GSK can partner with them to supply the capital and eventually market the products, without having to shoulder the high costs of early R&D (p. 10). Elasticity concepts that can influence the pricing strategy or competitiveness of GSK GSK’s products have particularly high price elasticity of demand, insofar as patented drugs are concerned because there are few substitutes, the drugs as of great necessity to their users, and therefore demand is not affected by increasing prices.

After the patent life, however, price elasticity drops and generic drugs compete on lower prices. Income elasticity of demand is also high for patented drugs because reduction in customers’ income does not reduce quantity demanded as the drugs are necessary. Finally, price elasticity of supply is also high, because for each patented drug, the firm commands a monopoly and thus controls the price (Boldrin & Levine, 2008).

GSK’s efficiency in the use of its resources As earlier noted, GSK is able to realize a higher profit and higher earnings per share despite comparatively lower revenues than its competitors. It is able to rationalize its expenses throughout its pipeline by having newly developed drugs ready for market just as the patents of its former income-generating drugs mature (i. e., their patent expires). Furthermore, GSK’s leadership in the vaccine sector is capable of supporting its “aggressive moves to bolster its presence in key markets” (Datamonitor, 2011, p.

6). GSK’s supply chain relies on quality yet reasonably-priced suppliers; despite this, the high cost of basic research threatens the profitability of GSK, since only one in six drug candidates that enter clinic trials is approved by the FDA (PhARMA, 2011, p. 10). Therefore, the company makes strategic acquisition of small biotech companies with strong prospects, or enter into collaborative agreements with them, so that the risk of a failed basic research effort early in the R&D of the drug will be shared.

The resource efficiency of GSK also lies in its own R&D process, wherein projects are systematically evaluated so that poor risks may be discontinued early, rather than carry them to completion only to determine that they fail clinical trials or the FDA review. This screening process is shown in the diagram on the next page. Projects are screened from one stage to the next, and the most promising are identified so that resources may be concentrated on them. Source: PhARMA, 2011, p. 12 References Boldrin, M & Levine, D K 2008 Against Intellectual Monopoly.

Cambridge University Press, Cambridge. Datamonitor 2011 GlaxoSmithKline plc Company Profile. Accessed from EBSCO. GlaxoSmithKline plc 2011 Annual Report for Shareholders. Accessed from GSK company website. GlaxoSmithKline plc 2011 Form 20-F, as filed with the U. S. Securities and Exchange Commission, March 13, 2012. Accessed from GSK company website. PhRMA 2011 Profile of the Pharmaceutical Industry. Pharmaceutical Research and Manufacturers of America, Washington D. C. Yahoo Finance 2012 GlaxoSmithKline. Accessed 27 June 2012 from http: //finance. yahoo. com/q/co? s=GSK+Competitors

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