Founded in 2000 as the result of a merger, GlaxoSmithKline was the sixth largest pharmaceutical company in the world in 2015. It has suffered its scandals - pleading guilty to promoting unapproved use of drugs in 2012 and funnelling $3.8 billion to doctors in China for 6 years but the organisation as a whole has had great success including creating the world's first malaria vaccine.
With the appointment of Emma Walmsley as the new chief in September 2016, it raised a lot of questions about the future success or failure of GlaxoSmithKline.
After spending the majority of her career working within L'Oréal and specifically consumer products, it was part of her role to convince the company's investors and colleagues of her ability to turnaround GSK. With a few turbulent years, profits were hit hard after the decline of the Advair severe asthma treatment which was GlaxoSmithKline's biggest product. In 2016, improvements started after the company developed new respiratory medicines and improved growth in HIV drugs. However, these new drugs were a joint venture with Pfizer, a more successful pharmaceutical company. It is still important that GSK develops links and products with competitors as it can improve bonds and relationships. A potential future impact that Emma Walmsley should consider is the drug price and healthcare issue in the US and the potential privatisation of the NHS - these could both impact her strategy.
With a dependence on the highly competitive respiratory medicine market and the past chief preferring to increase growth through sales volume rather than profit margins, it will be interesting to see in which direction Walmsley chooses to take the company.
Focusing on the capital structure of the company, GlaxoSmithKline has one of the highest yielding dividends in the pharmaceutical industry at approximately 6%. The board has defended the pay-out throughout the company's turbulent years and has also promised to keep the pay-out at a steady rate, showing the company are actually invested in their shareholders. However, will this impact badly on the business in other aspects or areas? Let's have a look...
- Although the dividend pay-outs are high, Glaxo's investors are looking for an improvement in the share price performance, as the company have been lagging behind their peers and competitors for years.
- Committing to this level of dividend pay-out will limit the funds available for other parts of the business, for example acquisitions or future investment in Research and Development
Whilst there are lots of theories about how capital structure should work - managers don't seem to fit any of the observations so it can be hard to predict how managers will react and potentially change structures within the business.
As we know, debt is cheaper than equity. With equity, there is a higher risk and high returns are demanded - like GSK's dividend pay-out. With debt, risk and cost is lower. A lender may require a lower rate of return compared to ordinary shareholders in exchange for security or collateral. Obviously, depending on debt could lead to the company becoming financially distressed. Management would have to focus on short-term liquidity rather than long-term growth which could be frustrating for Walmsley who seems to be particularly focused on GSK's future growth, strategy and objectives. It would also cause uncertainty in customers' and suppliers' minds - causing a direct impact on sales isn't helpful since GSK are trying to gain a performance edge.
The trade-off model indicates that up to a certain point, gearing and lending can actually increase shareholder wealth. Beyond this point, it becomes too risky, affecting share price and shareholder wealth. This would be detrimental to the success of GlaxoSmithKline as they currently have a good relationship with shareholders thanks to their consistent dividend pay-out, and the fact that investors want the share price to improve.
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