Positives

Defensive qualities
1 Largest pharmaceuticals company in UK
2 Second largest pharmaceutical company in the world.
3 S&P rating AA/Stable/A-1+ (at 12-10-07).
4 Risks spread over diversified portfolio of products in nine therapeutic areas.
5 Financially strong
6 Relatively less vulnerable to economic cycles

Good non-executive directors
1 Innovative approach to selection of CEO to succeed JP. The candidates were each asked to oversee a special project for the company to assist the board in its selection process. Mr Viehbacher has been set the task of improving “pharmaco-vigilance” at GSK and the way in which the company monitors safety issues. Mr Witty has been leading a drive on marketing and exploring ways that GSK could improve GSK’s sales operation. Mr Stout has been examining the potential for greater outsourcing in Glaxo’s manufacturing operation. Consultants interviewed the candidate’s subordinates to get their views of their boss. The NED’s decision was apparently unanimous due to the speed with which the result was announced.
2 The tests for the candidates indicates that the NEDs take seriously the need to reduce the risk of Avandia type debacles, change in marketing strategy to keep growing and increasing profitably, e.g. by outsourcing manufacturing.

Potential for growth in sales
1 Gained market share relative to Pfizer (largest pharmaceutical company) in 2005
2 Global pharmaceuticals sales grew 7% in 2005. GSK increased its market share to 6.3%. Assuming that the market continues to grow at 7% and that GSK at least maintains its market share, it seems reasonable to expect a total return (yield + growth) that adequately compensates for risk. Management guidance eps growth of 8-10% at CER for 2008.
3 Financial strength leaves scope to make opportunistic acquisitions for growth and share buy backs
4 Smaller companies that develop new products would need involvement (co-development, commercialisation, sale of full or part ownership, etc) of large companies like GSK to realise their potential.
5 Ageing populations consume more drugs.
6 More knowledgeable and demanding citizens
a TV news coverage about Jane Tomlinson's husband complaining that she was denied Lapatanib that may have prolonged her life. This is marketed in the U.S. as Tykerb, having received FDA approval in Mar 07.
7 Previously terminal illnesses being converted to chronic illnesses
8 More countries joining WTO will result in greater patent protection in markets that GSK would not otherwise consider entering.
9 Expensive drugs becoming more affordable in E7 BRIC + Turkey+ Indonesia+ Mexico) countries due to their rapidly increasing wealth
10 New CEO (Whitty) was chosen for his marketing presentation. Whitty has spent many years in far east and will probably look for growth there.
11 Pipeline - Outside commentators seem to think that GSK has the best pipeline in the industry. From the 2006 annual report:• In February 2007, GSK had 158 pharmaceutical and vaccine projects in clinical development, compared with 149 in February 2006• 31 major product opportunities were in phase III development or registration (13 NCEs, 6 new vaccines, 12 PLEs), including:– – Cervarix (cervical cancer) – Coreg CR (cardiovascular conditions)– Tykerb (breast cancer) – Trexima (migraine)– Allermist (allergic rhinitis) – H5N1 (pandemic ‘flu vaccine).

Potential for growth in eps, other than through growth in sales
1 Share buybacks
2 Retained earnings
3 Potential for restructuring (demerging consumer products part and/or splitting into manufacturing, R&D and marketing).