Executive summary

This report serves two purposes. Firstly, it provides a valuation and analysis of GlaxoSmithKline plc (GSK) using Shareholder value analysis (SVA) method. Secondly, it examines the GSK-Novartis’s oncology-vaccines asset swap through the lens of competitive advantage.

The SVA method produces an equity valuation of £84,854m for GSK, compared to the actual market capitalization of £77,015m as of January, 17^th 2017, the SVA-based valuation indicates that the company is being 9.2% undervalued by the market. The examination of the asset swap’s context suggests that GSK divested its oncology business because it lacked the scale to sustain competitive advantage in oncology market, whereas by acquiring Novartis’s vaccines portfolio, the company obtains sustainable competitive advantage other competitors in the vaccines market.

Recommendations discussed include:

• For GSK, reducing WACC through leveraging to can increase its shareholder value.
• For investors, paying attention to how GSK chooses to maintain competitive (through further deals or improvement of its underlying capabilities), and how it makes profit under differential pricing because they will significantly influence GSK’s shareholder value.

1.1 Company profile

GlaxoSmithKline Plc (GSK) is one of the world’s leading research-based pharmaceutical and healthcare companies that operates through three key segments of Pharmaceuticals, Vaccines, and Consumer Healthcare. The company develops, manufactures, and distributes vaccines, prescription drugs, and over-the-counter medicines, as well as consumer healthcare products. The company is quoted on the London and New York stock exchange with headquartered in Brentford, United Kingdom.

The three segments together generated £23.9 billion in 2015 with much of the turnover coming from Pharmaceuticals business. Operation in the US and Europe accounted for 73% of the group’s turnover (GSK, 2015)

GSK has positioned itself among the largest companies in the global pharmaceutical industry, with sales ranked 7^th based on 2015 turnover (Figure 1). With the acquisition of Novartis’s global Vaccines business, GSK effectively owns over 20% of the global Vaccines market share with the most comprehensive portfolio in the industry. GSK, along with Sanofi S.A, Merck & Co., and Pfizer Inc, forms an unchallenged oligopoly in the Vaccines market with 87% of total market share (Figure 2). The joint venture with Novartis that GSK has controlling interest is a world-leader in Consumer Healthcare business, ranked 3^rd in sales in 2015 (Figure 3).

GSK is known for its global presence with 101,255 employees in more than 150 markets. It ranked No.1 in customer trust for both Respiratory and Vaccines in the U.S in 2015. In addition, GSK possesses one of the most powerful distribution network of 89 manufacturing sites around the world (GSK, 2015). However, what differentiates GSK from other pharmaceutical giants is that it has the most well-diversified drug portfolio, with the lowest ratios for the contribution of top-3 drugs to its revenues in 2015 compared to other top companies[1] (Dezzani, 2016).