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Fin 6601

Fall, 2008

Nroop Bhavsar

Prerak Shah

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Table of Contents

Executive Summary…………………………………………………………………..4

Financial Analysis…………………………………………………………………….6

Company Information and Market Analysis…………………………………………10

o Stock analysis

o Risk analysis

o Debt(Bond) analysis

In-depth analysis of share buy-back program for the capital structure decisions….14

GSK & E-commerce………………………………………………………………….18

Multinational operations……………………………………………………………..21

GSK in the news……………………………………………………………………...26

Conclusion……………………………………………………………………………29

Appendices……………………………………………………………………………31

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Executive Summary

GlaxoSmithKline plc (NYSE: GSK) is a global healthcare group engaged in the creation,

discovery, development, manufacture and marketing of pharmaceutical and consumer health

related products. The company operated in two segments: Pharmaceuticals (Prescription

pharmaceuticals and vaccines), and Consumer Healthcare.

Key ratios analysis over the last three years proves company’s strong liquidity, even though

beginning of credit crisis in August, 2007. Overall profitability of company is well above

average of the industry or the competitors. Asset management and debt ratios build a strong

capital structure of a company.

In market analysis section, GSK’s stock price is compared with market proxy-Dow Jones

Industrial Average and its competitor- Pfizer, Inc. Further, company’s securities’ holding

risk is explained by the application of beta. We explained how beta of the company is

related to rate of return company gets on its securities. Company’s cost of debt, which is

YTM of its publicly traded bond, is determined and compared with US treasury bond yield

curve.

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Key Stock Statistics

52- week Range$54.64 -

31.02Market Capitalization (B) $93.27Common Shares O/S (M) 5,550.00Dividend Rate/Share $2.14$10 Invested 5 Yrs Ago $9,061

In our in-depth analysis topic, we have chosen GSK’s share buy-back program to be a best

borrowers in 2008. We briefly explained how this program helped company to raise capital

by borrowing money and built its capital structure. We have taken importance of share buy-

back in consideration for capital structure decisions.

In next section, we explained how GSK uses E-commerce, E-business and internet to

increase profitability and combat with fierce competition. GSK has collaborated with many

tech companies to expand its E-commerce operations.

GlaxoSmithKline has operations in some 114 countries, with products sold in over 140

countries. We explained company’s global operations in term of its international growth

strategy. Further, we explained how company manages geographical and exchange rate

risks.

In the last section of the report, we noticed GSK in the world news from a number of

acquisitions to selling of some assets, from tax disputes to investments in research; from

joining Sipp to launching new RFID pilots.

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Financial Analysis- Key ratios & analysis

The number of key ratios like liquidity, profitability, debt and asset management are

analyzed below with their 3-years average and industry average as a norm for comparison

and analysis:

Liquidity

2005 2006 2007 3-year average Industry average

Quick Ratio 1.13 1.15 1 1.09 1.087Current Ratio 1.39 1.51 1.32 1.41 1.98

Financial strength looks at business risk. The stronger a company is from a financial

standpoint, the less risky it is. The quick ratio compares cash and short term investments to

the financial liabilities they expect to incur within a year’s time, while current ratio

compares year-ahead liabilities to cash on hand now plus the other inflows, the company is

likely to realize over that same 12-month period.

Here, quick ratio is almost as same as the industry average is, but current ratio falls below

the industry average. This shows that company is doubtful to maintain current operations as

usual with current cash reserves in bad periods. Thus, the firm might have or have not

enough resources to pay its debt over the next 12- month period.

Profitability

2005 2006 2007 3-year average Industry averageGross Margin% 78.01% 78.43% 76.59% 77.68% 53.93%

Net Profit Margin% 22.23% 23.67% 23.38% 23.09% 14.12%ROA% 19.21% 20.85% 18.78% 19.61% 11.73%ROE% 71.94% 64.55% 54.92% 63.80% 25.55%ROI% 30.04% 30.57% 27.27% 29.29% 22.57%

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These ratios summarize overall profitability, or the bottom line. Firm’s ROA, ROE and ROI

% are much higher than industry averages. These enormous figures of return show that

company gets massive returns on its investments. Higher return on equity indicates possible

greater debt proportion in firm’s capital structure. A company’s ability to operate

profitability can be measured directly by measuring its return on assets. Company’s assets

are found to be profitable in generating revenues. It shows firm’s higher efficiency at

generating profits from every dollar of net assets.

Debt

2005 2006 2007 3-year average Industry average

Total debt to equity 0.89 0.58 1.1 0.86 0.43

LT debt to equity 0.72 0.51 0.74 0.66 0.36

Interest coverage 17.4 29.07 20.83 22.43 Not available

The LT debt to equity ratio looks at the company’s capital base. The total debt to equity

ratio includes long term debt and short term debt. Firm’s higher debt to equity ratio

compared to industry average indicates greater debt proportion in company’s capital

structure that supports higher ROE% in above paragraph. In addition, it shows that company

has been aggressive in financing its growth with debt. Company’s higher interest coverage

ratios over the last 3 years indicate its ability to pay interest on outstanding debt. Thus, we

can say that company is generating sufficient revenues to satisfy interest expenses.

Asset management

Column1 2005 2006 2007 3-year average Industry average

Total asset turnover 1.49 1.73 1.61 1.61 0.69

Inventory turnover 17.06 19.72 16.55 17.78 9.6

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Firm’s higher asset turnover ratio indicates its efficiency to use its assets in generating

revenues which supports higher number of ROA%. These higher figures of asset turnover

ratio give possibility of company’s lower profit margins that tends to have higher asset

turnover. Higher inventory turnover stands for strong sales of company along with the

possibility of ineffective buying.

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Company Information & Market Analysis

GlaxoSmithKline PLC (NYSE:GSK), formed through the merger of British drug makers

Glaxo Wellcome and SmithKline Beecham in December 2000, ranks as the world’s second

largest pharmaceutical company. GSK group engaged in the creation, discovery,

development, manufacture and marketing of pharmaceutical and consumer health-related

products. GlaxoSmithKline supply one quarter of the world's vaccines and by the end of

February 2008 GSK had 24 vaccines in clinical development. It has operations in some 114

countries, with products sold in over 140 countries. The company operates in two segments:

Pharmaceuticals (prescription pharmaceutical and vaccines) and Consumer Healthcare

(over-the-counter medicines, oral care and nutritional healthcare). The company offers a

wide range of respiratory drugs, the most important of which is Seretide/Advair (2007 sales

of $7.0 billion), a leading asthma treatment. GSK is believed to be the leader in HIV/AIDS

therapeutics, with its Trizivir, Epivir and Combivir drugs. The markets for its products are

the United States, France, Japan, United Kingdom, Italy, Germany and Spain. The U.S.

accounted for 48% of pharmaceutical sales in 2007, Europe 30% and other regions 22%.

The dollar value of the global pharmaceutical market was projected to exceed $770 billion

in year 2008, according to IMS Health.

Stock price performance & Risk analysis

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GlaxoSmithKline is a pharma giant which is listed on the Dow Jones Industrial Index, so to

know the stock price performance of the company we had compares GSK with the index

itself. The goal of the performance analysis is to determine the attractiveness of a market

and to understand its evolving opportunities and threats. To get a better idea of company’s

position we also had compare with one of the competitor Pfizer Inc (PEF) in the chart.

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In the chart we have consider a five year period starting form 2004 to the date.

GlaxoSmithKline Plc (GSK) share was trading at $44.63 in the beginning of the year 2004.

Due to strongest R&D position in the global pharmaceutical industry by the subsidiaries of

GSK they were able to grow constantly with the market as compare to the competitor Pfizer

(PFE). The stock kept its upward trend and reach at its lifetime highest price of $59.35 in the

year 2007 against the industry which was in downward trend. The downward trend can be

seen form the PFE’s performance. Since the financial crisis the market has been in a free

fall, which affect the stock performance of GSK and it also had been hurt from this effect,

the stock now has been trading around $35. So in spite of having advantage of good pipeline

and a better growth company stock has been on a decline. So from the market trend we can

say that GSK is very constantly moving with the market and doing much better than the

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pharmaceutical industry. But as market analysis give us a general idea about the trend as an

industry, for an in-depth analysis of the company we have to take into consideration another

measure called Beta.

Beta is a measure of the risk for the project or projects undertaken by the company. In other

words Beta of the stock can be defined as weighted average beta of all the projects under

taken by the company. Beta contains mainly two type of risk: financial risk and business

risk. Beta can be calculated by using statistical measure of regression. By using regression

analysis, we have found different measure like R square, intercept and the coefficient. Form

the calculation we got GlaxoSmithKline Plc has beta of 0.66. On the other hand published

data about GSK stock shows beta of 0.58. So there are two different betas available now

which are because of different reasons like:

Published beta includes both risks, while calculated beta includes only business risk.

As business risk is unsystematic risk, it can be avoided by choosing firms with lower

unlevered beta.

Different time period may be considered when calculating beta.

Frequency of the transaction may be different

Different market proxy may be considered or

Different market database may be used to calculate the beta.

The main objective of the manager is to maximize the value of the shareholders; they

achieved that by doing capital budgeting decision and capital structure decision. For that

they try to keep their firms risk at lower level to give investor more return on their

investment. From the beta we can know how much riskier the investment and what should

be the expected return form that investment in the company. The published beta for GSK is

0.66 which means that if the market moves 1 point upward or downward, the stock of the

firm will move 0.66 in the same direction of the index.

Debt (Bond) analysis

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Yield to maturity, YTM, is considered as cost of debt of a firm. It is a measure of the return

of a bond. It allows investors to calculate the fair value of different financial instruments. It

is almost always given in terms of annual effective rate.

The bond is priced relative to a benchmark, usually a government security. The yield to

maturity on the bond is determined based on the bond's rating relative to a government

security with similar maturity or duration. The better the quality of the bond, the smaller the

spread between its required return and the YTM of the benchmark. This required return is

then used to discount the bond cash flows.

The duration of a bond measures the sensitivity of the bond's price to interest rate

movements, expressed as a number of years. The reason for expressing this sensitivity in

years is that the time that will elapse until a cash flow is received allows more interest to

accumulate. Therefore the price of an asset with long term cash flows has more interest rate

sensitivity than an asset with cash flows in the near future.

US treasury bond yield curve YTM%

Source: Bloomberg

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Here, corporate bond has always higher risk as compared to Government treasury bonds that

are considered as risk-free securities. Thus, GSK has to pay higher premium to the investors

to lend money to the company. This is the reason why corporate bonds have higher yields.

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Best Borrowers 2008: GlaxoSmithKline

(Capital Structure Decision- Bond Issues for Share Buyback Program)

Stock Buyback Program:

When a corporation buys its own stock on the open stock market, it is considered a "stock

buyback" and the shares purchased are re-titled "treasury stock”. A share repurchases or

stock buyback distributes cash to existing shareholders in exchange for a fraction of the

firm's outstanding equity. That is, cash is exchanged for a reduction in the number of shares

outstanding. The firm either retires the shares or keeps them as treasury stock, available for

re-issuance.

Benefits of Stock Buybacks

Increased Shareholder Value & Stock Price - When a company reduces the amount of shares

outstanding by declaring a stock buy back program, each of your shares becomes more

valuable and represents a greater percentage of equity in the company. There are many other

ways to value a profitable company but the most common measurement is Earnings per

Share (EPS). If earnings are flat but the number of outstanding shares decreases

automatically earnings increases. An increase in EPS will often alert investors that a stock is

undervalued or has the potential for increasing in value.

Increased Float - When a company repurchases its own shares, it reduces the number of

shares held by the public so, even if profits were to remain the same, this would have the

effect of increasing earnings per share. So, repurchasing shares, particularly when a

company's share price is undervalued or depressed, can provide a competitive return on

investment. As the number of outstanding shares decreases, the remaining shares of GSK

represent a larger percentage of the float. If supplies are less against demand, there will be

potential upward movement in the price of a stock.

Income Taxes benefits for the company - Share repurchases also allow companies to

covertly distribute their earnings to investors without inflicting them with double taxation 15

When excess cash is used to buyback company stock, in lieu of increasing or paying

dividends, shareholders often have the opportunity to defer capital gains and lower their tax

bill if the stock price increases. Also, if the stock is held for more than one year the gain will

be subject to lower capital gain rates.

They also minimize transaction costs.

Price Support - Frequently companies announce a buyback after its stock has taken a hit,

which is merely an overt action to take advantage of the discount on the shares. This lends

support to the price of the stock and ultimately provides security for long-term investors

during rough times.

Potential Pitfalls

Not all buybacks are equal and some buybacks seem to be nothing more than an attempt to

manipulate the stock price.

Buyback Percentage- there is a direct relation between the percentage of buyback and

chances of success means higher the percentage of buyback greater the potential for profits.

Unfortunately, the buyback percentage is not typically part of an announcement so in order

to determine if there is any significance to the announcement you'll need to do some

research. Don't assume that a large number of shares is necessarily a large percentage.

Stock buyback programs take advantage of supply and demand by reducing the number of shares

outstanding, increasing EPS shareholder value, float and ultimately the price of stock.

GlaxoSmithKline capital structure decision

Capital Structure of a company is a mix of a company's long-term debt, specific short-term

debt, common equity and preferred equity. The capital structure is how a firm finances its

overall operations and growth by using different sources of funds. Companies need capital

in order to run their business, do necessary investments and grow larger and faster. These

actions are combined with high costs where both internal and external financing. GSK is

raising fund thru bond issue for its share repurchase program, which is a long term capital

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structure decision for the firm. Generally by capital structure everybody refers to the debt to

equity ratio i.e. D/E ratio. The table of GSK’ debt and equity is as follow.

Yearlong-term debt in millions of £

Common equity in millions of £

Debt to equity ratio (D/E)

2003 3651 7720 0.472004 4381 5925 0.742005 5271 7311 0.732006 4772 9386 0.512007 11380 9910 1.15

In case of GSK, over the last 5 years period, debt position had increased continuously with

two main points to attend: Long term debt declined slightly in 2006 and went skyrocketed in

2007. And now in the year 2008 Glaxo has raised a massive $9 billion by issuing bond

which is a long term debt. They distributed it in four parts of $2.75 billion due in 2038,

$2.75 B due in 2018, $2.5 B in 2013 and $1 B due in 2010. Debt increases the burden of the

company in terms of interest payment. Here, Company using more of debt capital because it

is confident about returns from the existing projects. Company has confidence that returns

will be higher than cost of debt. GSK will be using this fund for the purpose of a buyback

their existing shares which sends signals about the company's prospects to the market--

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hopefully, that prospects are so good that the best investment can be made in the company

now and they believe that the shares of the company are trading at lower price than its actual

value.

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GSK & E-commerce

In the last two decades application of E-commerce is evolving from technology driven to

more user driven. E-commerce aids to exchange information and execute transactions

among enterprises and individuals. It facilitates electronic adaption of communication for

business process via EDI (Electronic Data Interchange). E-commerce provides the

pharmaceutical industry with better mode of transaction to achieve competitive advantage

and sustained growth. This enhances the value of the industry through key underlying

processes such as, high value drug innovation, clinical development and trial, project and

people management, marketing and sales.

E-commerce has 3 major impacts on the pharmaceutical industry:

I. Enhances the values of the latest clinical developments

II. Increases shareholders’ value

III. Successfully reduces the time-cycle of research and application

On the finance standpoint, E-commerce helps firm to,

Reduce costs

Improve supply chain management processes

Influence capital structure and budget processes of a firm

With the help of internet or E-commerce, there may be direct relationship between the

consumer and the drug manufacturer. Creating this new way of drug manufacturing and

distributing instead of the traditional way, will give many tasks for supply chain

management.

GSK and E-commerce

GSK is delivering award-winning E-commerce solutions focused on wholesalers, retail

chains and the hospital segment. GSK has been using E-commerce since last decade to

improve research functions within the firm and thereby reducing the costs. It has been in

agreements with or collaborated with the consulting firms and IT firms to develop E-

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commerce functions, ultimately to improve efficiency of firm’s operations by keeping the

operating costs constant and increasing shareholder’s value.

Some of the examples are given below:

Microsoft® Visual Studio®.NET and Microsoft.NET Framework

GSK has found Microsoft technology as the right prescription for creating XML web

services. GSK used Microsoft Visual Studio.NET and the Microsoft.NET Framework to

create a new web-based product catalog. This gave few benefits to the company:

Catalog Administration Tool allowed content business owners to enter their own

product updates, thus seeing the results in real time without having the developers

write the queries manually.

XML web service makes the catalog available to any platform

Allowed GSK to improve content delivery

E-procurement platform

GSK will lease e-business software for global sourcing from Emptoris. It will implement

Emptoris’s ePASS system, a portfolio of collaborative sourcing applications, across

operations in the US, UK and elsewhere.

The system will allow GSK to perform,

Supplier qualification management

Reverse auctions

Other internet based negotiations with suppliers

SciQuest.com

SciQuest.com, Inc., a leading B2B e-marketplace for the global scientific products industry

came in to the agreement with Glaxo Wellcome Inc.. According to agreement, Glaxo

Wellcome utilized SciQuest.com’s e-marketplace for the purchase of third-party laboratory

suppliers via a private marketplace.

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The e-marketplace provided Glaxo Wellcome’s research staff with access to information on

almost one million scientific products. Users will be able to,

Search multiple suppliers’ products simultaneously

Compare product attributes

Order from multiple companies on one consolidated order form

Track order status

CambridgeSoft Electronic Notebook Software

CambridgeSoft Corporation, the leading provider of E-notebook solutions has entered into

an agreement with GSK to provide software licensing to GSK’s R&D facilities.

GSK selected CambridgeSoft’s E-Notebook for the flexibility it demonstrated across the

wide range of data separated in the many disciplines and functional areas within GSK’s

Discovery Organization. GSK is partnering with CambridgeSoft to customize the E-

Notebook to meet GSK requirements and integrate with key applications and workflow

tools.

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Multinational operations

GSK is a global healthcare group engaged in the creation, discovery, development, manufacture and marketing of pharmaceutical and consumer health-related products. It has and operations in some 114 countries, with products sold in over 140 countries.

The company operates in two segments: pharmaceutical and consumer healthcare.

Estimated 7% of the world’s pharmaceutical market

Every minute more than 1100 prescriptions are written for GSK products

around the world

10 manufacturing facilities around the world for investigatory and

launching drugs and then after two years of early production, company has

80 manufacturing plants around the world for new pipeline products

United Kingdom

The UK department of Health has selected GSK’s cervical cancer vaccine for its

national immunization program.

The program aims to protect against the two types of human papillomavirus(HPV)

that are responsible for approximately 70% of cervical cancers, will start in

September 2008 and will vaccinate girls aged 12 to 13 each year.

This represents one of the largest HPV national immunization programs in the world

to date and GSK looks forward to working with more governments around the world

to ensure that as many girls and women as possible can benefit from cervical cancer

vaccination with Cervarix.

Africa

GSK is extending its portfolio in Africa in a joint venture with South African

based pharmaceutical company Aspen to boost its emerging market sales.

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Demand for pharmaceuticals in emerging markets is forecast to grow by 13%- triple

that of traditional Western markets- and will account for 40% of growth in the

worldwide pharma market by 2020.

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Other emerging market operations

Santarus, Inc., a speciality pharmaceutical company, has entered into agreements

granting exclusive rights to GSK, to commercialize prescription and OTC immediate-

release omeprazole products for a number of markets in GSK’s international region

including Africa, Asia, Middle-East, Central and South America and to distribute and

sell ZEGERID® brand prescription products in Puerto Rico and the U.S. Virgin

Islands beginning in the first quarter of 2008.

Under the license agreement, GSK will be responsible for the development,

manufacturing and commercialization of omeprazole products in up to 114 countries,

excluding U.S., Europe, Australia, Japan and Canada.

Led by new CEO Andrew Witty, a new management team will form an “emerging

markets” unit focused on building business in China, Russia, Brazil, India and the

Middle East.

Singapore

GSK is working with the Economic Development Board (EDB) on a 10-year

‘Strategic Roadmap’ to identify new growth opportunities in Singapore.

EDB and GSK look forward to map out the tremendous growth opportunities in

healthcare and Asia, and to explore how Singapore and GSK can jointly develop

innovative solutions to meet the needs of patients and the marketplace.

Hong Kong

GSK Hong Kong pharmaceuticals is one of the leading companies in the Hong

Kong pharmaceutical industry. It also has leadership in four major therapeutic areas-

antibiotics, anti-virals, respiratory and vaccines.

GSK Hong Kong consumer healthcare markets a portfolio of healthcare products,

OTC medicines, nutritional drinks and oral care products.

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Poland

GSK ramped up drug production at its polish site as it prepared to more than

double the number of markets the plant would supply in March 2007.

Poznan operation currently undertakes finished dosage manufacturing and packaging

of a number of its mature tablet form products for 30 global markets.

Latin America

Labopharm and GSK have come to an agreement wherein GSK will market and

distribute Labopharm’s once-daily tramadol pain medication in 20 Latin American

and Caribbean countries.

Under the terms of the license terms, Labopharm will supply GSK with bulk tablets

and GSK will register, package and distribute the product throughout the licensed

territory.

Foreign Exchange Risk Management

GSK has entered into forward foreign exchange contracts in order to swap liquid assets and

borrowings into the currencies required for company purposes. At 31st December 2000, the

firm had outstanding contracts to sell or purchase foreign currency having a total notional

principal amount of £10,531 million (at 31st December 1999 – £7,093 million). The

majority of contracts are for periods of 12 months or less.

At the end of the year the firm had a number of currency swaps in place in respect of

medium-term debt instruments. Two medium-term notes issued in Japanese yen were

swapped into floating rate US dollars. The 7.0 per cent US$350 million Euro note 2002 and

the 2.0 per cent CHF 250 million Bond 2004 were both swapped into floating rate yen. Each

of these swaps matures on a date close to the maturity date of the underlying instrument.

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International growth strategy

As a leading global pharmaceutical company, GSK wants to establish more

international commercialization capabilities.

GSK has established a new business model of prioritizing emerging economy

investments in capacity and regulatory expertise to strengthen the company’s

footprint in growth markets

Acquisitions- GSK says “ smaller firms come calling “. Acquisition reinforces

GSK’s ongoing efforts to invest in and expand its business as part of the company’s

strategy to globalize and diversify.

Small drug companies squeezed by the credit crunch are turning to GSK to discuss

being acquired. Some of the important acquisitions include:

o Sirtris Pharmaceuticals Inc.

o Cambridge biotech

o Egyptian mature products business of Bristol Myers Squibb

o Agreement with AstraZeneca for Alvedon

o ID biomedical corporation- major step toward fulfilling our mission of

becoming a leading global influenza vaccine manufacturer.

Vaccine Boost- with the flu season approaching, GSK has expanded its flu vaccine

capabilities in North America.

Biotech Strategy- GSK is shifting more to a biotech approach, creating small units of

up to 80 scientists to pursue development programs. Those groups will then apply for

research funds from a central investment board. It plans to also set up a venture arm

to invest in promising new therapies pursued by early-stage companies or set up

small companies to focus on Glaxo drugs.

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Revenues(Turnover) and Operating Profits of GSK’s multinational operations in USA, Europe and the other

Multinational Segments

Revenues (Turnover) in £ millions

Operating profits in £ millions

2007 2006 2005 2007 2006 2005

USA 10400 11362 10,185 2,849 2,495 2,016

Europe 14,009 14,007 12,303 3,671 2,701 2,798The other international sector 10,911 9,349 8,547 1,073 2,612 2,060

Total 35,320 34,718 31,035 7,593 7,808 6,874

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GSK in the news

GSK to lead the way with group Sipp

GSK has become the first FTSE 100 company to offer members of its GBP5bn pension

scheme access to a group self-invested pension plan (Sipp).

The group Sipp, which will be provided by Legal & General (L&G), allows members to

incorporate savings built up in the company’s defined benefit, defined contribution or share

save schemes into a wide range of investment funds. Workers will be given access to 300

insured funds from 40 fund managers.

The Government’s state saving scheme, set for launch in 2012, has prompted many

employers to assess their benefit arrangements alongside a general desire for more

integrated long-term saving options. This helps company to manage costs and liabilities and

thus maintaining target debt to equity ratio.

New generation of Sipps was becoming popular as people realized they could save more for

retirement by including previously non-pensionable items, such as maturing scheme shares,

into benefit arrangements.

GSK and the IRS finally find relief with Zantac

The primary issue in the GSK case was the transfer price at which the UK parent, GSK, sold

drugs (primarily Zantac) to its US subsidiary. In a parent-subsidiary transaction such as this,

the transfer price does not affect the overall profit of the group, but it does affect the overall

taxes paid by the group.

Thus, GSK is now more focusing on its pricing strategy which directly affects its sales plan

and financial plan. Such transfer price strategy has to follow an arm’s length transaction.

Harvard stem cell research gets boost; GSK promises $25 m

GSK has agreed to sponsor at least $25 million in work at the Harvard Stem Cell Institute in

Cambridge, one of the largest investments in stem cell research ever by a major

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pharmaceutical company. As a part of five year agreement, GSK has agreed to support

research at Harvard University and four Harvard affiliated hospitals to try to find cures for

cancer, obesity, diabetes and neurological, cardiac and musculoskeletal diseases. Harvard

officials said the parties will share the rights to any discoveries they make together, even

though GSK is funding the work.

Benefits on finance standpoint:

The company also agreed to help fund Harvard’s “seed grant” program, which

supports early stage research. Although, GSK spent nearly $4 billion on R&D in

2007, this would add minimal amount to research budget of the company. As plenty

of drugs in pipeline, GSK hopes to get through early stage research as soon as it can.

Stem cell research has huge potential to aid in the discovery of new medicines. With

the patents expiration and generic drugs expansion, company really needs some new

drugs to launch in the market to sustain growth.

GSK’s new RFID pilot

GSK recently announced that it has begun putting radio frequency identification (RFID) tags

on individual bottles of HIV drug Trizivir which is one of the 32 drugs most susceptible to

counterfeiting or diversion. Here are some of the benefits GSK hopes to attain to reduce

costs:

Better authentication of the product includes electronic product authentication and

electronic pedigree documentation

To gain a better understanding of how to implement RFID and capture its myriad

business results

Targeted recalls

Improved inventory management, forecasting and planning

Better supply chain oversight

Glaxo drug hits UK insurance hurdle

UK’s National Institute of Clinical Excellence, which decides what treatments are made

available free to UK patients, is not recommending Tyverb’s use by the National Health

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System. Adoption of NICE’s recommendation would mean UK patients will be

disadvantaged compared with patients in other European countries where drug is

reimbursed.

UK is the parent nation of the company and this is the place where GSK hopes to generate

maximum revenues. NICE’s recommendation would hurt GSK’s strategy. Thus, GSK said it

remains committed to working with NICE and the NHS to make the medicine available to

patients in the UK.

Somehow, GSK thinks that acquiring more costs related to Tyverb, would create positive net

present value for the company if it succeeds to be sold in the UK. This is the reason why

GSK proposed bearing the cost of treating all eligible patients with Tyverb for up to 12

weeks, with the NHS funding treatment only for those patients who benefited from the drug.

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Conclusion

GlaxoSmithKline Plc (GSK) is listed in the Dow Jones Industrial Index. Having a strongest

R&D pipeline and a unique business model company’s stock is moving vertical form $44.63

in year 2004 to $59.35 in 2007. The stock has been very consistent with the market and with

the better growth rate than other rivals in the industry. The stock price has been declining

since Feb 2007 due to financial crisis in the market and has been trading around $35 now.

But it did not hurt as much as the industry, which reflects the strong business model and

financial stability of the company.

In the year 2008, GlaxoSmithKline has raised $9 billion form the bond issue to finance its

share buyback program. As the program is funded by debt issue it will affect capital

structure of the company. As debt increases, the interest expense will be higher for the

period of time but it will increase the value of the remaining shares. This will provide signal

to investor that company’s share is fairly under-price and company sees price going up in

near future.

Strengths and weaknesses of company on finance stand-point

For GSK, earning per share (EPS) was $2.76 in 2003 and it has been increasing over

the period of time. In the year 2007 the EPS was $3.72 and it’s expected to increase

in the year 2008.

GSK is subject to risks associated with the pharmaceutical business model, including

patent expirations, generic drug companies’ challenges, pipeline failures and clinical

trial risks.

Large number of blockbuster drugs losing patent protection over the next few years

providing significant opportunities for this sector.

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Dec' 05 Dec' 06 Dec' 07Earning Per Share 0.82 0.95 0.94Dividend Per Share 0.44 0.48 0.53P/E 11.96

GSK’s increased collaborative works with IT companies to expand E-commerce and

E-business, will lead company to reduce its operating costs significantly.

Company’s global growth strategy stands for the company’s growth in the future

through acquisitions and investments in biotech companies.

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Appendices

o Regression analysis

o GSK’s bond information

o E-commerce articles

o Consolidated financial statements

o Multinational operations

o News Articles

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