Sunday 21 December 2014

GSK must learn from some tough medicine

Dr John Lynch

Published 13/01/2014 | 02:30

WE have been so overwhelmed in this country by the proliferation of scandals that we probably haven't noticed that it is happening elsewhere, too.

Over the past few years we have seen a chorus of outrage against a number of pharma companies, including Wyeth, Eli Lilli and Johnson & Johnson.

All have had their knuckles rapped and pockets emptied by hefty fines. In the past four years, the industry has had to shell out an amazing $13bn in payments to the authorities for not sticking to the rules.

However, the biggest of these recent pharma scandals -- and the one that drew the largest fine -- involved the UK drug giant Glaxo Smith Kline (GSK). The fine was $3bn; the largest ever imposed on any drug company. Having offended one superpower (the US) the company proceeded to offend another (China), which was downright careless.

This year, the Chinese government accused GSK of using a network of travel agencies to channel bribes worth $500m to Chinese doctors, hospitals and government officials.

To cope with the fallout, GSK recently announced it was scrapping sales targets to prioritise "the interests of patients". The public relations expert who dreamt up that excuse should go back to PR school.

GSK has been across my investment radar for many years and I'd have expected a far superior degree of professionalism.

It is, of course, big enough to be taught a lesson. It employs 100,000 across 150 countries with 87 manufacturing and R&D sites, including three sites in Ireland. The company is structured around three divisions; prescription medicines, consumer health products and vaccines.

Prescription medicines is the largest division, with sales of £18bn (68pc of group sales). Its consumer health products division accounts for £5bn of group sales, having its focus on oral care and over-the-counter medicines like Panadol, and also includes skin care, following its acquisition of Stiefel for $3bn.

Vaccines, of which GSK produces 30, including diphtheria, tetanus and hepatitis, account for £3bn in sales. Group sales last year were £26bn and operating profits were £3bn. The US is GSK's largest market with sales of £8bn, followed by both Europe and emerging markets with sales of £7bn.

But its business is shifting to growth markets like Asia/Pacific and Latin America and the territories outside the US and Europe now account for 40pc of group sales. One of the reasons why GSK has been across my radar is because of its generous dividend policy. It returned £25bn in dividends and buy-backs to shareholders in the past five years and continues to pledge its commitment to higher payouts -- good news for income investors.

The firm has a market value of £77bn and its share price of £15.98p is down from a yearly high of £18.16 recorded this year. GSK will bear close attention in the coming years as it deals with the reshaping of its US and European businesses.

Its impressive R&D programme (£3bn in 2012) should help. And like all giants of its size, cost control is high on the agenda. But transparency is now vital; pharma regulators have begun to bite.

NOTHING PUBLISHED IN THIS SECTION SHOULD BE TAKEN AS A RECOMMENDATION, EITHER IMPLICIT OR EXPLICIT, TO BUY OR SELL ANY OF THE SHARES MENTIONED.

Irish Independent

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