New Products
GlaxoSmithKline PLC is a science-led healthcare entity that deals with the development of innovative pharmaceuticals, consumer healthcare products, and vaccines (GlaxoSmithKline PLC, 2017). The company introduced a number of pharmaceuticals and vaccines in the year 2016. Some of these new products were RelvarlBreo Ellipta, Anoro Ellipta, Incruse Ellipta, Menveo, and Bexsero (GlaxoSmithKline PLC, 2017). The new products accounted for about 24% of the total pharmaceuticals sales.
Quality of Existing Products
The existing product generated 83.71% of the total revenue. This amounted to $23.4 billion. The core operating profit that was generated from the existing products amounted to $6.5 billion. This indicates that the existing products have immensely contributed to the success of the business. This can be explained by the fact that the company has been able to find additional uses for these existing products.
Return on Equity
The 2016 performance was driven by the new products which gained a lot of momentum during the year. This can be attributed to the high demand for the products. Thus, the number of sales that were generated from the new products doubled as compared to the results of the previous year. The profit for the year amounted to $1,062 million. Out of this amount, $173 million was attributed to the new products. The total equity was $4,963. Thus, the return on equity for the new products is 3.49%, while for the entire company is 21.4%. This shows that the company is selecting good products and services for investment (GlaxoSmithKline PLC, 2017).
Return on Capital
The net income for the year 2016 amounted to $1,062 million, while the total capital was $23,753. The resulting value of return on capital for the entire company is 4.471%. The value that is associated with the new products is 0.73%. The ratio is quite low and it is caused by the high amount of debt (GlaxoSmithKline PLC, 2017).
Financing of the Initiative
The initiative was financed using debt. A review of the financial statement shows that the value of debt is about 3 times that of equity. This signifies that the company is highly levered. This high amount of debt is majorly spent on research and development. Since the company is highly levered, raising capital through debt is easier than equity. This is based on the fact that potential equity investors shy away from extremely levered companies due to the high-interest cost. Further, the company has been able to maintain a fairly constant amount of debt. The times interest earned ratio shows that the GlaxoSmithKline PLC is solvent because the operating expenses can cover the interest expense (Horner, 2013). Therefore, using debt is advantageous because the value of the company is maintained (Goyal & Goyal, 2013).
There are a number of microeconomic variables that have affected the performance of some sections of the company. GlaxoSmithKline PLC faced a declining pressure on prices in some of its markets. This can be attributed to the competition. In addition, there was deterioration in the growth of emerging markets. Since the company has a presence all over the world, foreign exchange fluctuations also affected the performance negatively. For instance, translation of financial results of foreign subsidiaries often resulted in foreign exchange losses (Marshall, McManus, & Viele, 2014). This affected some reported balanced. The negative impact of these microeconomic variables was offset by the outstanding performance that was reported in some regions such as the US and Italy. Therefore, the variables did not affect the value of the company and operating income. Also, the healthcare sector’s value and operating income continued to grow despite a tough microeconomic environment (GlaxoSmithKline PLC, 2017).
References
GlaxoSmithKline PLC. (2017). GSK annual report 2016. Web.
Goyal, V. K., & Goyal, R. (2013). Financial accounting (4th ed.). New Delhi, India: PHI Learning Private Limited.
Horner, D. (2013). Accounting for non-accountants (9th ed.). Philadelphia, PA: Kogan Page Limited.
Marshall, D. H., McManus, W. W., & Viele, D. F. (2014). Accounting: What the numbers mean (10th ed.). New York, NY: McGraw-Hill/Irwin.