Glaxo Smith Kline GlaxoSmithKline -

Glaxo Smith Kline

GlaxoSmithKline - Business Case Analysis

Case Issue Number 1: Abroad Purchase

GlaxoSmithKline is faced with lower sales revenues within the United States as the population prefers to purchase their drugs from abroad at lower prices.

Case Issue Number 2: Product Development

GlaxoSmithKline has been criticized for the side effects of some of their medicines, so they need to invest more in product research and development

Case Issue Number 3: International Expansion

However GlaxoSmithKline already operates in 150 countries around the globe, they desire to penetrate the markets of the developing and less developed countries in order to increase patients' access to medicines.

Current Situation

GlaxoSmithKline is the world's most renowned pharmaceutical company, with annually increasing turnovers, investments and profits. They play a significant role in both national and international healthcare industries.

A. Current Performance

GlaxoSmithKline's profitability for 2006 is measured with the aid of five profitability ratios: gross margin, operating margin, pre-tax margin, net profit margin and effective tax rate (detailed at paragraph 4.C.2.)

The profit after taxes adherent for 2006 was of 5,498 million GDP, 14% higher than the profit for 2005. (GSK 2006 Annual Report)

The 7% turnover growth adherent to fiscal year 2006 in comparison to 2005 is explained by the sales increase of the company's main products. As such:

The market share by value in the anti-asthma and COPD class registered percentages of 29 in European countries and 33 per cent in the United States

The market share for 2006 within Europe registered a 2 per cent increase as compared to fiscal year 2005, but within the United States, the market share was stagnant.

The lack of growth on the U.S. market is due to the lower prescriptions generated by "a label change in early 2006 that restricted GSK's ability to promote the product, offset by favourable pricing changes." (GSK Website, 2007)

During fiscal year 2006, the GlaxoSmithKline pharmaceutical company has registered a 29.66% return on investment, when the ROI for the entire industry was of 13.56%. (Reuters, 2007)

B. Strategic Posture

Mission

GSK's mission is clearly stated on their website, banners, posters, annual reports and it is highly visible throughout their campaigns and actions. As such:

The company's challenging and inspiring mission refers to improving the quality of human life by enabling people to do more, feel better and live longer. (GSK Website, 2007)

Directly connected with the mission is the manufacturer's spirit. They describe themselves as enthusiastic entrepreneurs who are dedicated to innovation. They value integrity, high performances and fair employee treatment, all with the final goal of becoming a successful world class global leader. (GSK 2006 Annual Report)

Objectives

The company's objectives are not clearly stated, but are simply suggested throughout actions, performances and statistics. From these information sources, the GlaxoSmithKline objectives could be structured as follows:

increase both national and international market share (CI#3);

sustain growth in Europe and promote growth in the U.S.;

increase turnover, sales revenues and profits;

value employees and increase their fidelity to the company;

invest in Research and Development in order to discover new medicines and perfect the existent ones (CI#2);

produce the best and highly competitive products

Strategies (GSK 2006 Annual Report)

1) Optimizing the performance of key products (CI#2)

The strategy is implemented in order to increase the sales of the corporation's major products and the activities developed towards this direction include:

excelling as an international sales force;

excelling in marketing the pharmaceutical and consumer healthcare products and services;

promoting and maintaining the highest standards, both professional as well as ethical;

balancing the cost-benefit report.

2) Delivering the product pipeline for patients

The strategy implies that GlaxoSmithKline develops a system to support their product pipeline and to manage it throughout a product's complete life cycles. The strategy is implemented for the best benefit of customers and it is aimed to present patients with the best product pipeline in the healthcare industry.

It is primarily based on the innovations made by the Research and Development Department and its main goal is to satisfy the unmet needs of customers'.

3) Being the best place for the best people to do their best work

The strategy is based on the desire to register the highest organizational performances and it is implemented throughout four actions:

the recruitment and training of the best qualified personnel; the promotion of a culture based on adequate reward and motivating incentives; the implementation of adequate communication and employee involvement within the organizational goals; hiring qualified, diverse and healthy personnel.

4) Improving access to medicines (CI#3)

This strategy was developed with the purpose of presenting more and more individuals with the opportunity of purchasing medical products and services. GlaxoSmithKline take pride on their efforts to improve people's access to drugs by penetrating neglected countries and by attempting to develop medicines that treat neglected diseases.

Policies

GSK have developed their policies in full accordance with social, economical, political and legal backgrounds and use them as guiding elements on their path to achieving their mission. The most common policies refer to:

the company's code of conduct; clinical trials; sales and marketing ethics; informed consent; animals in research; genetic research; drug safety and reporting safety data. (GSK Website, 2007)

II. Corporate Governance

A. Board of Directors

The GlaxoSmithKline Board of Directors is composed of fourteen directors, eleven of which are non-executive directors and the rest of three are the CEO, the CFO and the R&D Chairman. The board members are presented below (GSK Website, 2007):

1. Sir Christopher Gent - is a Non-Executive Chairman of the GSK plc. And Chairman of the Nominations and Corporate Responsibility Committees, since the 1st of June 2004. Prior to GSK, Gent was a CEO and board member at Vodafone; Chairman of the Supervisory Board of Mannesmann AG; a non-executive director of China Mobile Limited and member of the Verizon Wireless management board.

2. Dr. Jean-Pierre Garnier - is Chief Executive Officer since 2001. He has occupied various managing positions; he posses a PhD in pharmacology and an MS in pharmaceutical science from the University of Louis Pasteur in France.

3. Roy Anderson - is an Independent Non-Executive Director and a professor of Infectious Disease Epidemiology in the Faculty of Medicine, Imperial College in London. He is the former Chief Scientific Adviser at the Ministry of Defence in the United Kingdom and the next Rector of Imperial College, starting with the summer of 2008.

4. Dr. Stephanie Burns - is an Independent Non-Executive Director at GSK and chairman, president and CEO of Dow Corning. She holds a PhD in organic chemistry.

5. Lawrence Culp - is an Independent Non-Executive Director at GSK and President and CEO of Danaher Corporation.

6. Sir Crispin Davis - is an Independent Non-Executive Director and CEO of Reed Elsevier plc. Former CEO and board member at Aegis Group plc; knighted for his services to the information industry.

7. Julian Heslop - Chief Financial Officer since April 2005. He is the former Senior Vice President and Operations controller.

8. Sir Deryck Maughan - is an Independent Non-Executive Director, Managing Director of Kohlberg Kravis Roberts and Co., Chairman of KKR Asia, Non-Executive Director of Reuters Group. Former CEO and Chairman of Citigroup International and of Salomon Brothers Inc.; former Vice Chairman of the New York Stock Exchange.

9. Dr. Daniel Podolsky - Independent Non-Executive Director, Mallinkrodt Professor of Medicine and Chief of Gastroenterology at Massachusetts General Hospital and Harvard Medical School, Chief Academic Officer of Partners HealthCare System. He is specialized in innate immunity, gastrointestinal disorders and trefoil proteins.

10. Sir Ian Prosser - Senior Independent Non-Executive Director, Non-Executive Deputy Chairman of BP plc, Non-Executive Director of Sara Lee Corporation and member of the CBI President's committee. Former Non-Executive Director of SmithKline Beecham plc; former Chairman of Six Continents PLC and the World Travel and Tourism Council

11. Dr. Ronaldo Schmitz - Independent Non-Executive Director; Independent Non-Executive Director of Legal and General Group plc and a member of the board of directors of Rohm and Haas Company and Cabot Corporation.

12. Moncef Slaoui - is the Chairman of the Research and Development Dept; member of Corporate Executive team and the Board of GlaxoSmithKline plc. He holds a PhD in molecular biology and immunology and postdoctoral studies at Harvard.

13. Tom de Swaan - Independent Non-Executive Director, member of the Supervisory Board of Van Lanschot and board member of the Institute of International Finance. He is a former board member and CFO at ABN AMRO; former board member of Dutch Central Bank and former Chairman of Basel Committee.

14. Sir Robert Wilson - is an Independent Non-Executive Director at GSK; Independent Non-Executive Director of BG Group and the Economist Group. He was Executive Chairman of Rio Tinto plc.

B. Top Management

The GlaxoSmithKline top management is formed of the following fifteen members (GSK Website, 2007):

1. Jean-Pierre Garnier - Chief Executive Officer

His efforts are focused towards lowering the drug prices for the less developed countries with the condition that this does not have a negative impact upon the overall company. He says that if the prices are still too high, the UN should offer subsidies. (Boseley, 2003)

2. Rupert Bondy - Senior Vice President and General Counsel

He played a key role in the merger between Glaxo Welcome and SmithKline as well as after the merger. Bondy developed an efficient post merger legal department and he ensured legal representation to all organizational departments. (Practical Law Company, 2003)

3. John Clarke - President, Consumer Healthcare

Clarke is the main actor on the company's Consumer Healthcare market and it is due to him that oral hygiene, over-the-counter and nutritional healthcare products have been promoted by GlaxoSmithKline. (Forbes Magazine, 2007)

4. Marc Dunoyer - President, Pharmaceuticals Japan

He extensively promoted the anti-allergy Zyrtec drugs in Japan and around the world.

5. Russell Greig - President, Pharmaceuticals International

Greig is in charge of the GSK operations outside the United States, mainly Japan and the European countries and his actions cover more than one hundred countries. (Forbes, 2007) His primary focus is on developing drugs that fight against the human immunodeficiency virus.

6. Julian Heslop - Chief Financial Officer

As CFO, Heslop is in charge of "financial reporting and control, tax and treasury, finance systems, internal audit, insurance and real estate. " (Forbes, 2007)

7. Bob Ingram - Vice Chairman Pharmaceuticals

Robert Ingram ensured the successful merger between Glaxo and SmithKline. He was responsible for the actions taking place in Latin and Northern America and in 1997, when he became Vice Chairman, his curricular responsibilities expanded at an international level.

8. Duncan Learmouth - Senior Vice President, Corporate Communications and Community Partnership

The Senior VP is in charge of "investor relations, internal and external communications, the GSK's image and its partnerships with global communities." (Forbes, 2007)

9. Bill Louv - Senior Vice President, Information Technology and Chief Information Officer

Louv has detained several it positions within the corporations and has had numerous contributions to the information sector. Today, he is in charge of "information technology, a global function that enables key business processes across all parts of the Group." (Forbes, 2007)

10. Dan Phelan - Senior Vice President, Human Resources

Former lawyer, Dan Pulman is now charged with the human resource management. As such, he is responsible for "benefits, compensation, recruitment, organisation development, leadership development and succession planning, human resource information systems and employee health management." (GlaxoSmithKline Annual Review for 2006)

11. David Pulman - President, Global Manufacturing and Supply

Prior to his current responsibilities with global manufacturing and supplies, Pulman was in charge of the supply chain and network, manufacturing strategy and logistics within North America. (GlaxoSmithKline Annual Review for 2006)

12. Moncef Slaoui - Chairman, Research and Development

The Chairman of the R&D Department leads GSK's "complex drug discovery and development activities. Furthermore, he has eengineered the development of a robust vaccines pipeline." (Forbes, 2007)

13. David Stout - President, Pharmaceutical Operations. He is "responsible for all pharmaceuticals and vaccines operations worldwide, including the U.S., Europe, International, Japan and Global Manufacturing and Supply." (GlaxoSmithKline Annual Review for 2006)

14. Chris Viehbacher - President, U.S. Pharmaceuticals

He is the company's image within the United States and his aim is to present the population with the best products that can easily prevent, cure or alleviate diseases. Viehbacher is also a supporter of aiding and addressing the issues that torment developing countries, in order to support them develop and get better access to medical care. (CI#3)

15. Andrew Witty - President, Pharmaceuticals Europe

Witty is currently the President of Pharmaceuticals Europe but he has recently been elected to succeed CEO Jean-Pierre Garnier upon his retirement in May of 2008. "Andrew's appointment follows a rigorous selection process by the Board of Directors. The fact that we have been able to select a successor to JP from three strong internal candidates is a testament to the quality of management at GSK." (GSK Website, 2007)

III. External Environment: Opportunities and Threats (SWOT)

A. Societal Environment

1. Economic factor - increased prices. This can be regarded as both an opportunity as well as a threat. As such, high prices offer the company the opportunity to increase their sales revenue. On the other hand, they pose the threat of customer dissatisfaction. The United States healthcare is a billion dollars business, registering 14.1% of the country's gross domestic product. (Shull and Morris, 2003) However, customers complain about the unjustifiable high prices. (CI#1)

2. Socio-cultural opportunity: A development opportunity is given by a demographic factor and it encompasses the aging generation of Baby Boomers. The generation with the largest birthrate is now composed of senior citizens who purchase pharmaceutical products worth of billions of dollars each year.

A combination of the two features results in the population's search for cheaper medicines. A solution seems to be offered by the abroad purchase of healthcare products and services, especially from Canada and also from several European countries. (Shull and Morris, 2003) (CI#1)

3. Technological threat: The developing technologies are also posing a threat on the United States healthcare sector because they allow buyers to purchase their drugs online. If during the past years, only a limited number of citizens were able to travel abroad and buy their medicine, today, with the aid of the internet, anyone can purchase drugs from abroad at prices 80% lower than those in the U.S. (Shull and Morris, 2003) (CI#1)

4. Political-legal opportunity: Since the legislature on the matter of abroad purchase of drugs was rather inconclusive, the GlaxoSmithKline found a way to limit the amount of drugs bought from Canada by ceasing their shipments to pharmaceutical companies within the foreign country. Concerned with senior citizens' ability to purchase the drugs, the U.S. Congress desired to legalize personal import of prescribed medicines from Canada, but the bill was never implemented. (Shull and Morris, 2003)

The threats and opportunities are derived from past events and have present and future implications on both GlaxoSmithKline as well as upon the entire U.S. healthcare system. The forces are present in all countries of the globe, but have different manifestations and intensities, based on the region's particular features, such as economic status, political and legal background, GDP or living standards.

B. Task Environment

There are basically six forces that affect the healthcare industry in each country and these forces refer to new entrants, buyers, substitute products, suppliers, competitors and environmental powers. (Mind Tools, 2007) the effects these forces have upon industries vary based on each country's personal features. The influence these forces have upon the GlaxoSmithKline and the overall U.S. healthcare system are presented below:

Threat of new entrants - low: GlaxoSmithKline is the second largest medicines producer in the world, so new entrants do not pose a threat.

Bargaining power of buyers - high: consumers speak their mind and often protest against the restriction imposed by Glaxo upon sending supplies to Canada. They boycott the company and pressure the government into annulling their decision.

Threat of substitute products or services - low: However there exist alternatives to drugs and medical services (such as nature-based treatments or acupuncture), prescribed drugs are the consumers' first choice.

Bargaining power of suppliers - high: Suppliers can easily affect the company by modifying their prices and contractual conditions.

Rivalry among competing firms - medium: Since GlaxoSmithKline is the second largest producer, they face reduced competition from smaller companies.

Relative power of unions, governments, special interest groups etc. - high: special groups might influence the government into implementing laws that force GlaxoSmithKline to continue their shipments of supplies to Canada.

Threats are being posed by the consumers' demands that might force Glaxo into resuming their shipments to Canada and by the Congress' intention to promote laws that do not support the Glaxo practices.

C. Summary of External Factors

Among the most relevant forces that currently influence GlaxoSmithKline and the U.S. healthcare system are the consumers' discontent with the high prices and their search for cheaper alternatives. (CI#1) for the future, the industry is expected to be influenced by legislative rulings and the technological developments that allow consumers to easily re-import drugs.

IV. Internal Environment: Strengths and Weaknesses (SWOT)

A. Corporate Structure

GSK has expanded their activities into a total of 150 countries across Europe, North America, Central and South America, the Caribbean, Asia and Australasia, Southeast Asia, Africa and the Middle East. The corporation operates here throughout their 2 divisions: GlaxoSmithKline Pharmaceuticals and GlaxoSmithKline Consumer Healthcare, structured as follows (GSK Website):

1. GSK Pharmaceutics a) Medical Directorate: Medical Affairs, Quality Assurance, Regulatory

Affairs, Clinical Research b) Sales and Marketing c) Distribution, Logistics and Consumer Services

2. GSK Consumer Healthcare a) Sales Department b) the Marketing Department: The Brand Team c) the Dental Detailing Team

There is no ambiguity regarding the structure, as it is understood and respected by all employees. The decisions are generally taken by the top management and the boards of directors, with the assistance and consideration of operational managers. The current structure entirely complies with the company's overall goals, strategies and policies and it reveals GSK's international operations.

B. Corporate Culture

The company's culture, also called the GSK Spirit, is based on a firm set of beliefs that are aimed to aid the entire population, while in the same time respecting all moral, political and economical regulations. The GSK Spirit is reveled on five directions (GSK Website):

New Product Portfolio - execution and efficient management of all products and services, including already existent products as well as developing ones (CI#2)

Product Commercialization -strong relationships between the company and the customers; efficient marketing campaigns; strong link between R&D and sales

Global Competitor - expand internationally and aid people from all parts of the world (CI#3)

Operational Excellence - create the best products and services; reduce costs; reach all goals

GSK People - Glaxo places increased value on the human resource and gives them the feeling that throughout their work, they contribute to people's health.

These values are applied in all 150 countries where GSK operates and entirely respect employees' background, education, religion, sexual orientation and all in all, their diversity.

C. Corporate Resources

1. Marketing

GlaxoSmithKline possesses proper marketing authorization and highly skilled and trained marketing teams. Their primary goal is to identify and address all safety concerns in regard to the GSK products. They also present the products to pharmacists, medical doctors and the final customer. The marketing actions are developed in full accordance with all regulations and the marketing policies refer to "providing full and accurate information, gifts to healthcare professionals and appropriate hospitality for meetings." (GSK Website) a) Product

Prescription medicines, consumer healthcare (such as oral hygiene products or nutritious drinks) and vaccines

Extensive product line of drugs treating several diseases b) Promotion developed and implemented by the marketing department based on the beneficial effects of products aimed at medical doctors, pharmacists and final customers c) Price adapted to region and based on the country's particular features; for instance, the price is lower in developing and less developed countries and higher in developed countries (CI#1) some medicines can be purchased through compensations d) Place

150 facilities opened in Europe, America and Asia online purchasing at company's webpage, http://www.gsk.com

2. Finance

Financial highlights for 2006:

Turnover million GBP

R&D investments million GBP

Operating Profit million GBP

Profit after taxation million GBP

Earnings per share pence

Net Debt million GBP

Share price at 31st of December

GBP

Ratios

Value for fiscal year 2006

Valuation Ratios

P/E Ratio

Price to Sale

Price to Book

Dividend Yield

Profitability Ratios

Gross Margin

Operating Margin

Pre-tax Margin

Net Profit Margin

Effective Tax Rate

Management Effectiveness

Return on Assets

Return on Investment

Return on Equity

Efficiency Ratios

Receivable Turnover

Inventory Turnover

Asset Turnover

Data retrieved from Reuters Website, 2007

1. Valuation Ratios - compare the price of a company stock with other stocks on the market

1.1 Price to Earnings (P/E) Ratio = Price per Share / Earnings per Share

The GSK's P/E Ratio is lower than the industry's (12.99

1.2 Price to Sales Ratio = Share Price / Revenue per Share

The GSK price to sales ratios is similar to the industry's ratios (3.75), meaning that the Glaxo stocks are valued similar to other company stocks in the industry.

1.3 Price to Book = Stock Price / (Total Assets - Intangible Assets and Liabilities)

It is higher than the industry's ratio (6.88 > 4.50), meaning that the GSK stocks might be over-evaluated

2. Dividend Yield = Annual Dividends per Share / Price per Share

The 4.22% dividend yield shows that investors get 0.0422 GBP for each GBP they have invested within Glaxo

3. Profitability Ratios

They reveal GSK's performance in terms of realized profits

All five ratios are higher that the industry's average ratios, meaning that Glaxo realizes increased profits when compared to other corporations that activate within the medical products sector

4. Management Effectiveness Ratios

They "compare financial measures from company financial statements to evaluate management performance" (Gerlach, 2007)

All three ROI, ROA and ROE are significantly higher that the industry's and sector's ratios, meaning that Glaxo possess qualified management

5. Efficiency Ratios

They measure how well GSK can manage their resources and assets in order to register maximized profits

The Receivable and Inventory Turnover are lower that the industry average ratios (6.16 and 2.76)

The Asset Turnover is higher than the industry ratio (0.64)

3. Research and Development (R&D) (CI#2) a) Genetics research - aims to identify the human genes that might cause several diseases; to foresee a patient's response to a certain medicine and to develop new and better medicines and treatments b) Discovery research - generates compounds that would improve the quality of medicines and treatments c) Drug discovery - analyzes all the information available, conceives an initial form of the drug, tests it, analyzes its effects and side effects and improves it'd) Preclinical development - supplies the necessary chemicals, searches for ways to increase the efficiency of medicines, establishes optimum dosages, analyzes the products and improves them throughout their full life cycle. (GSK Website)