PHARMACEUTICALS INDUSTRYTeam 12 Birdman Sachs
AGENDA
OVERVIEW OF COMPANIES
BUSINESS ANALYSIS AND FINANCIAL HIGHLIGHTS
RATIO ANALYSIS AND COMPARISON
RISK ANALYSIS AND MARKET PERFORMANCE
INVESTMENT CONSIDERATIONS AND RECOMMENDATIONS
GSK MRK NVS
COMPANY OVERVIEW
GSK
MRK
NVS
Offices in 115 countries
$44.4B Revenues
$128.41Bn Market Cap
89,000 Employees
$44.03B Revenues
$160.38Bn Market Cap
#2 Sales Worldwide
$57.9B Revenues
$217.32Bn Market Cap
Share
GSK
GSK CORPORATE GOVERNANCE
Institutions FundsOthers
ExecutiveNon-Executive
20%80%
67%33%
Ownership Board Profile
Board Experience
20%
27%53%
84%
GSK BUSINESS ANALYSIS AND FINANCIAL HIGHLIGHTS
Quality of Sales (09’-13’)
>1%US EU
PH VC HC
Operating Profits and Cost Analysis (09’-13’)
(1) 30% growth in Immuno-inflamation
products (2) 20% growth in
Antibacterial Vaccines (3) 36% decline in
Combivir
19.1%
SALE
SN
et In
com
e
GEO
UN
IT
High R&D ROI Royalty
IncomeTax
Incentives
(1) 1% increase in core operating profit (2) 1.6% Increase in
COGS (3) R&D ROI 14%
GSK BUSINESS ANALYSIS AND FINANCIAL HIGHLIGHTS
Operating Cash (09’-13’)
02000400060008000
2009 2010 2011 2012 2013
7.2B 7.8B 6.8B 4.3B 6.9B
Free Cash Flow (09’-13’)
01500300045006000
2009 2010 2011 2012 2013
6.0B 5.2B 5.0B 2.8B 5.3B
Capital Expenditures (09’-13’)
0475950
14251900
2009 2010 2011 2012 2013
1.9B 1.6B 1.3B 1.5B 1.7B
GSK BUSINESS ANALYSIS AND FINANCIAL HIGHLIGHTS
Financial Structure
Equity Debt
Dividends
Trends and Future Growth
3.1B 3.2B 3.6B 4.0B 3.9B
‘09 ‘10 ‘11 ‘12 ‘13
EPS 4% 8%
Products
+
+
MRK
MRK CORPORATE GOVERNANCE
Institutions FundsOthers
ExecutiveNon-Executive
50%50%
84%16%
Ownership Board Profile
Board Experience
16%
42%42%
76%
BUSINESS ANALYSIS AND FINANCIAL HIGHLIGHTS
Quality of Sales (09’-13’)
8%EM DM
PH CC
Operating Profits and Cost Analysis (09’-13’)
(1) Januvia went down
(2)Emerging markets grew by 2%
(3) CAGR sales of 14.3%
28.6%
SALE
SN
et In
com
e
GEO
UN
IT
$2.3B Acquisition
Cost
Low level of Productivity
Increased COGS
(1) Acquisition of AZ Electronics Material
MRK
BUSINESS ANALYSIS AND FINANCIAL HIGHLIGHTS
Operating Cash (09’-13’)
0325065009750
13000
2009 2010 2011 2012 2013
3.4 10.9 12.3 10 10.4
Free Cash Flow (09’-13’)
0500
100015002000
2009 2010 2011 2012 2013
1.5 1.7 1.7 2 1.9
Capital Expenditures (09’-13’)
0275055008250
11000
2009 2010 2011 2012 2013
MRK
1.9 9.1 10.7 8.1 8.5
BUSINESS ANALYSIS AND FINANCIAL HIGHLIGHTS
Financial Structure
Equity Debt
Dividends
Trends and Future Growth
3.5B 4.9B 4.8B 5.2B 5.3B
‘09 ‘10 ‘11 ‘12 ‘13
MRK
Products+
Higher Risk— Continued decrease in efficiency and
profitability
NVS
NVS CORPORATE GOVERNANCE
Institutions FundsOthers
ExecutiveNon-Executive
27%73%
80%20%
Ownership Board Profile
Board Experience
18%
44%38%
10%
BUSINESS ANALYSIS AND FINANCIAL HIGHLIGHTS
Quality of Sales (09’-13’)
4%EM DM
Growth Products PH
Operating Profits and Cost Analysis (09’-13’)
(1) Zometa and Diovan grew by 7%
(2) $8 Billion increase in sales
5%
SALE
SO
pera
ting
Inco
me
GEO
UN
IT
Increased margins
Low level of Productivity
Focused Innovation
(1)R&D expense goes down by 8%
NVS
R&D Cost Management
BUSINESS ANALYSIS AND FINANCIAL HIGHLIGHTS
Operating Cash (09’-13’)
1300013500140001450015000
2009 2010 2011 LTM LTM
14 14.3 14.2 13.2 13.2
Free Cash Flow (09’-13’)
0900
180027003600
2009 2010 2011 LTM LTM
2.2 2.4 3.1 3.6 3.6
Capital Expenditures (09’-13’)
0300060009000
12000
2009 2010 2011 LTM LTM
NVS
11.9 12 11 9.6 9.6
BUSINESS ANALYSIS AND FINANCIAL HIGHLIGHTS
Financial Structure
Equity Debt
Dividends
Trends and Future Growth
4.5B 5.5B 6.1B 6.2B 6.2B
‘09 ‘10 ‘11 ‘12 ‘13
NVS
Market Share
+ PH business
MID-HIGH SINGLE DIGIT GROWTH
CN RUS+DOUBLE
DIGIT GROWTH
NVSMRKGSK
RATIO ANALYSIS
NVSMRKGSK RATIO ANALYSIS
GSK MRK NVS Industry AverageCurrent Ratio 1.1X 2.1X 1.2X 1.7X
Quick Ratio 0.7X 1.4X 0.7X 1.2X
0
0.55
1.1
1.65
2.2
GSK MRK NVS Industry
LIQUIDITY
Quick Ratio
Current Ratio
NVSMRKGSK RATIO ANALYSIS
GSK MRK NVS Industry TA Turnover 0.6X 0.4X 0.5X 0.6XFA Turnover 3.0X 2.8X 3.4X 5.8XAR Turnover 4.9X 5.7X 5.9X 2.9X
INVT Turnover 1.9X 2.4X 2.8X N/A
0
1.5
3
4.5
6
GSK MRK NVS Industry
ASSET MANAGEMENT
FA Turnover
AR Turnover
TA Turnover
INVT Turnover
NVSMRKGSK RATIO ANALYSIS
GSK MRK NVS Industry AverageTotal D/E 2.7X 0.4X 0.3X 0.8X
Total D/C 0.7X 0.3X 0.2X 0.4X
TIE Ratio 10.4X 15X 22X 13.4X
0
7.5
15
22.5
30
GSK MRK NVS Industry
DEBT MANAGEMENT
Total D/C
TIE Ratio
Total D/E
NVSMRKGSK RATIO ANALYSIS
GSK MRK NVS Industry ROA 11.7% 6.3% 8.0% 8.6%ROE 60.9% 11.2% 14.3% 26.1%BEP 16.7% 8.4% 8.6% N/A
EBIT Margin 29.3% 22.6% 17.5% 23.6%
0
17.5
35
52.5
70
GSK MRK NVS Industry
PROFITABILITY
ROE
BEP
ROA
EBIT Margin
INDUSTRY SPECIFIC NUMBERS
PHASE I 27 4
PHASE II 46 19 27
NVSMRKGSK
PHASE III 31 16 23
N/A
INDUSTRY SPECIFIC NUMBERS
REGISTERED 11 7
APPROVED 8 3 2
NVSMRKGSK
4
MARKET PERFORMANCE
NVSMRKGSK
MARKET PERFORMANCE
PE: 15.65X PE: 37.81X PE: 21.88XNVSMRKGSK
5-year movement
MARKET PERFORMANCE
5-year Return
0
30
60
90
120
0 1.25 2.5 3.75 5
98.42%
78.75%
55.45%
118%105%
GSKMRKNVS DJIA S&P
RISK ANALYSIS
!Regulation and
Currency Exchanges
Intellectual Property and Production
Reputation
INVESTMENT CONSIDERATION
!-R&D Cost
Management -Strong Profitability
-High amounts of debt
-Weak Europe Sales -High P/E (GSK might
be overvalued already)
Pros Cons
Shor
t -Te
rm
-Strong Pipeline Products
-Strong US Sales -High Dividend Yield
-High amounts of LT debt
-Pricing Pressure from Generic Competition
Long
-Ter
m
GSK
BUY
Recommendation
INVESTMENT CONSIDERATION
-Post integration-acquisition potential
-Lower margins -Decline in Sales
-Lower FCF -High P/E (MRK might be overvalued by the
market)
Pros Cons
Shor
t -Te
rm
-Increasing demand in Emerging Markets -High Dividend Payout Ratio
-Weak Product Development -High COGS -Poor Cost
Management -Pricing pressure from generic competitionLo
ng -T
erm
MRK
Recommendation
HOLD
INVESTMENT CONSIDERATION
-Strong Price Momentum
-Increase in Sales -Good Inventory
Management
-Lower FCF -Under Leveraged
Pros Cons
Shor
t -Te
rm
-Better Capital Structure
-Better Debt Management
-Strong Operating Profit
!-High COGS
-Pricing pressure from generic competition
Long
-Ter
m
NVS
Recommendation
BUY
END OF PRESENTATION
APPENDIX: INDUSTRY OVERVIEW
!Industry value from $359 to
$476B (up 33%) by 2020
Major patent conflicts, stricter
measures, healthcare law
Growing generic
competition ($400M)
Fundamentals: Business depends on research, product development and patent applications
Challenges: Established companies are now focused on distribution efficiency, return on investments and pricing
pressures
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