GlaxoSmithKline - Not Too Easy To Put Down

| About: GlaxoSmithKline (GSK)


GSK is performing fairly well as apparent from its five drugs approved last year, one receiving positive opinion and ten drugs on course to the final stage of drug testing.

The Chinese bribery issue weighed heavily on the company's financials causing as much as a 61% decline in revenue.

Although still bleeding, the negative impact is now shrinking and vaccine sales has enabled the company to sustain the blow from China better than it could have managed otherwise.

GlaxoSmithKline plc. (NYSE:GSK) is one of the five big pharmaceutical companies that virtually control about 80% of the health industry around the globe. The company has grown over 2013 despite experiencing a few major headwinds. This article will shed some light on the recent performance and the problems faced by the company, and determine whether or not the company is poised to meet future growth targets.

2013 Performance

GlaxoSmithKline's revenues can be broken down based on geography and/or operational segments. Based on product wise segmentation, the company generates about 80% of its revenues from pharmaceuticals and vaccines whereas 20% of the revenues are attributable to its consumer healthcare segment. With regards to geographical distribution, we see that the company generates more than 60% of its revenues from the developed countries such as the USA and Europe. However, the attribution of revenue to these regions has declined over the years. Detailed distribution based on geography is indicated in the chart below.

Source: Annual Report 2013

The top line of the company remained flat over the year with very slight positive movement. The gross profit margin dropped by 200 basis points and impacted the operating profit margin as well. However, the company squeezed the impact by a hundred basis points by cutting down on its operating costs.

Comparing the company's total return with that of the S&P500, GlaxoSmithKline performed better than the index in spite of the bribery issue in China. GlaxoSmithKline yielded a total return of 24% compared to the index return of 22%. Moreover, the company is expected to continue to yield better results than its peers for at least the next couple of years as the company's sales levels increased while rivals struggled with generic competition and patent expiries.

Shareholder Profits

With regards to rewarding shareholders, the company distributes cash among its investors through dividends and share buybacks. GlaxoSmithKline is very generous when it comes to rewarding its investors. Over the previous year, the company distributed about 94% of its profits among the shareholders compared to the industry average of 18.48. As of now, GlaxoSmithKline's dividend yield is trending above its peers.

Source: Y-charts

In 2013, 70% of the total cash distribution was made via dividends while the remaining amount was distributed through share repurchases. The dividend increased by 5 percentage points compared to the dividends paid in 2012. The company hopes to further increase its dividends this year with a considerable amount allocated to share buybacks.


Over the previous year, GlaxoSmithKline performed better compared to its peers. The meager upward movement in the top line of the company entails strong positive performance by the company in the wake of rising generic competition and increasing patent expiries. Moreover, the company suffered a major headwind in China as the country allegedly accused GlaxoSmithKline of bribing doctors to bring growth to the company's top line.

The bribery issue weighed heavily on the top and bottom lines of the company causing as much as a 61% decline in revenue. Although still bleeding, the negative impact is now shrinking and fourth quarter revenue showed a 29% decline compared to the same period last year. The company is fully cooperating with the investigations and has reportedly penalized the CEO for overlooking the issue and took away 12% of his promised annual bonus.

Despite the negative blow received from China, the company still showed a slight positive increase in revenues. It is very encouraging news in the wake of such events. Over 2013, the company received approval for 5 of its six blockbuster medicines in the USA. The sixth medicine received positive opinions from the European Medicines Agency's (EMA) Committee for Medicinal Products for Human Use (CHMP). Vaccine sales enabled the company to sustain the blow from China better than it could have managed otherwise. Although costs of the investigations are unknown as of now, whatever the decision may be, the costs are more than just the monetary impact on the company's financials. GlaxoSmithKline is well aware of how the allegation impacted its overall reputation in China. It will take some effort on the part of the company to regain the trust and reputation from the doctors and consumers in the region.

What does 2014 Hold for GlaxoSmithKline

The year 2014 looks like it may be a profitable year for the company as apparent from its pipeline. This year, ten drugs are on course to enter the late stage trials. The China issue has begun to fade away as well as apparent from the reduced negative impact on sales.

In the pharmaceuticals and vaccine segment about 35% of the revenue is attributed to respiratory diseases. However, future sales from this segment are rather uncertain. Presently, consumers are not very confident about the beneficial impact of the new branded medicines compared to the older ones and the generics. Moreover, Novartis and other firms are increasingly trying to get a portion of the multi-billion dollar COPD market. With rising competition and shaky consumer confidence it may be harder for the company to materialize the projected billion dollar sales associated with some of its pipeline drugs. Considering these potential threats, GlaxoSmithKline maintains a projection to realize a low sales growth of 2% in 2014.

Concluding Remarks

The company has showed a positive performance despite the 61% plunge in its Chinese sales. Moreover, GlaxoSmithKline rewards its investors in a very generous manner as evident by its dividend yield. Last but not the least, the company is performing fairly well as apparent from its five drugs approved last year, one receiving positive opinions, and ten drugs on course to enter the final stage of drug testing.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.