Negatives

Litigation risks. One bad outcome can wipe out several years of profits. Numerous litigations at all times:
1 Product liablility, e.g. Paxi/Seroxat, Avandia, etc litigation, particularly in the USA, is inherently unpredictable and excessive verdicts that are not justified by the evidence can occur
2 GSK operates globally in complex legal and regulatory environments. In the USA, for example, GSK is responding to federal and state governmental investigations into pricing, marketing and reimbursement of its prescription drug products. These investigations could result in related restitution or civil false claims act litigation on behalf of the federal or state governments, as well as related proceedings initiated against GSK by or on behalf of consumers and private payers. Such proceedings may result in trebling of damages awarded or fines in respect of each violation of law.

Executives’ integrity suspect. (But NEDs seem to be addressing this – see “Good non-executive directors” in "positives".
1 Glossed over effects on heart re Avandia
2 Did not highlight risks of Paxil/Seroxat for youngsters
3 False Vitamin C claim re Ribena.

Risk of overpaying for acquisitions, licensing and marketing deals

Risk of failures in R&D and regulatory risks
1 Fewer NMEs being approved per R&D £ spent
2 Stricter regulatory controls heighten the risk of withdrawal by regulators on the basis of post-approval concerns over product safety, which would reduce revenues and can result in product recalls and product liability lawsuits.

No certainty of new products but existing products’ patents expire regularly.
1 From an article on 10 October in the Pharmaceutical Business Review Online:"However, Mr Witty has not been charged with an enviable task. GlaxoSmithKline is forecast by Datamonitor to record flat sales growth over the period 2007-12, reflecting the generally slow medium-term outlook anticipated for the biggest pharmaceutical companies as a whole. Exposure to generic competition remains the bane of the pharmaceutical industry with GSK no exception to this trend.The biggest impact on the company out to 2012 is the anticipated loss of US patent exclusivity for its best selling product - the asthma and chronic obstructive pulmonary disorder (COPD) therapy Advair/Seretide - in 2010. Furthermore, GSK will be forced to endure a decline in sales for its second biggest product - the diabetes treatment Avandia - which has been the subject of a FDA investigation following growing concern regarding its side effect profile."
2 Many of GSK’s patents expire within the next few years.

Political risks (specially US where 50% of sales are made)

Powerful customers and regulatory risks and price controls
1 Some governments intervene directly in setting prices. In addition, in some markets major purchasers of pharmaceutical products (whether governmental agencies or private health care providers) have the economic power to exert substantial pressure on prices. In the USA, where GSK has its highest margins and most sales for any country, pricing pressures could significantly increase following implementation of the pharmaceutical benefit under Medicare or in the event that other state programmes to control the cost of prescription drugs are adopted. As experience develops under the Medicare programme outpatient pharmaceutical coverage for its beneficiaries that began in 2006, the US government, or the private insurers through which coverage is offered, through their enormous purchasing power under the programme could demand discounts that may implicitly create price controls on prescription drugs. Changes to the enabling legislation could afford the US government a direct role in negotiating prices under the Medicare programme. Additionally a number of states have proposed or implemented various schemes to control prices for their own senior citizens’ programmes, including importation from other countries and bulk purchases of drugs. The growth in the number of patients covered through large managed care institutions in the USA, which is likely to increase with implementation of the Medicare benefit, also increases pricing pressures on GSK’s products. These trends may adversely affect GSK’s revenues and margins from sales

Risk of new products from competitors making GSK’s patents worthless

Tough competition from generics
1 Risk that challenges to GSK’s patents from generics manufacturers may succeed in some cases.
2 Generics manufacturers like Teva, Ranbaxy and Mylan are very efficient and obtain regulatory approval well in advance of patent expiry so that they compete immediately following patent expiry.

Parallel imports e.g. from Canada to USA or Greece to UK preventing GSK from realising higher prices set in the importing countries.

Risk that GSK’s manufacturing facilities may fall foul of regulations.
1 GSK’s manufacturing sites are subject to review and approval by the FDA and other regulatory agencies. Compliance failure by suppliers of key materials or GSK’s own manufacturing facilities could lead to product recalls and seizures, interruption of production and delays in the approvals of new products pending resolution of manufacturing issues. Non-compliance can also result in fines and disgorgement of profits. For example, at GSK’s Cidra, Puerto Rico facility supplies of certain products manufactured at Cidra were curtailed or constricted which had an adverse impact on sales in 2005 and 2006.

Risk from concentration of sales to wholesalers
1 In the USA, the three largest wholesalers amounted to approximately 80% of GSK’s US pharmaceutical sales. At 31st December 2006. GSK had trade receivables due from these three wholesalers totalling £1,044 million (31st December 2005 – £1,051 million). GSK is exposed to a concentration of credit risk in respect of these wholesalers such that, if one or more of them is affected by financial difficulty, it could materially and adversely affect GSK’s financial results

Taxation, e.g. transfer pricing.
1 In 2006, GSK settled with IRS for $3.3 billion regarding transfer pricing issues. While much of this had been provisioned, it nevertheless resulted in cash outflow of $3.1 billion.
2 GSK continues to have disputes with HMRC and the tax authorities in Canada and Japan. Though provisions are made for these, the provisions may be inadequate.