Report on Risk Analysis of GlaxoSmithKline Bangladesh

Prepared For: Rakibul Hasan

Course: ACT-341 Section: 01

Prepared By:
Rifatul Ahsan Yasdany Nafees Imtiaz A.K.M. Sharfuddin Chowdhury 102 0273 030 102 0009 030 093 0250 030

Profile of the Company

GlaxoSmithKline Bangladesh Limited carries with it an enviable image and reputation for the past 6 decades. A subsidiary of GlaxoSmithKline plc- one of the world's leading research-based pharmaceutical and healthcare companies GlaxoSmithKline Bangladesh, continues to be committed to improving the quality of human life by enabling people to do more, feel better and live longer. The Companys principle activities include secondary manufacture of pharmaceutical products and marketing of vaccines, pharmaceutical healthcare products and health food drinks In 1949 the Company commenced its journey in Bangladesh with its corporate identity as Glaxo in Chittagong as an importer of products from the Glaxo Group Companies. It started spreading its spectrum from being an importer to a manufacturer by establishing its own manufacturing unit at Chittagong in 1967. The facility till date is considered as one of the Centers of Excellence in Global Manufacturing & Supply Network of the Group. The global corporate mergers and acquisitions have seen the evolution of the Companys identity in the past 6 decades. In line with mergers and acquisitions the identity changed from Glaxo to Glaxo Welcome Bangladesh Limited following the Burroughs Welcome acquisition in 1995 and finally to GlaxoSmithKline Bangladesh Limited during 2002 after merger with

SmithKlineBeecham in December 2000. The mega merger of the Company enables it to deliver cutting edge advancements in health care solutions. The relentless commitment, setting of standards of ethical standards and quality backed leading edge technology of the Company has built a strong relationship between the stakeholders and GlaxoSmithKline Bangladesh. With the ever committed 615 numbers of personnel all over the country GlaxoSmithKlineBangladesh, which now comprises of both Pharma and Consumer, continually strive to meet the GlaxoSmithKline mission to improve the quality of human life by ensuring healthcare products, health drinks and different corporate social responsibility programs.

GlaxoSmithKline is committed to developing new and effective healthcare solutions. The values on which the group was founded have always inspired growth and will continue to do so in times to come.
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GlaxoSmithKline Bangladesh Limited was incorporated was incorporated on 25th February, 1974 as a public limited company as is with Dhaka Stock Exchange Limited. The Company is a subsidiary of Setfirst Limited, UK, which is 100% owned by GlaxoSmithKline plc.UK. The Principal activities of the company throughout the year continued to be manufacturing and marketing of pharmaceuticals, vaccines and healthcare products.

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Bangladeshs Pharmaceutical Industry and key competitors for GSK Bangladesh

In Bangladesh the pharmaceutical sector is one of the most developed hi-tech sectors within the country's economy. After the promulgation of Drug Control Ordinance - 1982, the development of this sector was accelerated. The professional knowledge, thoughts and innovative ideas of the pharmaceutical professionals working in this sector are the key factors for these developments. Due to recent development of this sector it is exporting medicines to global market including European market. This sector is also providing 97% of the total medicine requirement of the local market. Leading pharmaceutical companies are expanding their business with the aim to expand export market. Recently few new industries have been established with high tech equipments and professionals which will enhance the strength of this sector According to the UKTI (April, 2010) the total size of the pharmaceutical market of Bangladesh was estimated to be US$700 million in 2007. It also reports that the industry produced medication worth $715 million in 2007 with the market growing over 12% annually over the last half a decade and firms primarily focus primary on branded generic final formulations by using mostly imported APIs. According to the World Bank report (2008) about 80% of the drugs sold in Bangladesh are generics and 20% are patented drugs. It also reports that domestically Bangladeshi firms generate 82% of the market in pharmaceuticals and locally based multinational companies account for 13%, and the final 5% is imported. There are 240 registered pharmaceutical companies in Bangladesh where 164 of these actively involved in the manufacture or marketing of pharmaceutical products (Hussain et al., 2008).

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40 35 30 Growth Rate (%) 25 20 15 10 5 0 2000 2001 2002 2003 2004 2005 2006 Year 2007 2008 2009 2010 2011 2012

The top 30 to 40 companies dominate almost the entire market, where the top 10 hold 70% of domestic market share and the two companies Beximco and Square capture over 25% of the market (World Bank report, 2008). The pharmaceutical market of Bangladesh is dominated by a few large companies. This kind of market structure is defined as oligopoly (Gillespe, 2010, p. 302; Griffiths & Wall, 2008, p. 226; Salvatore, 2007, p. 340; Besanko et al, 2010, p. 221). The decisions of one company influence, and are influenced by, the decisions of other companies. For example, when the pharmaceutical market leader Square got the UK MHRA approval, the second largest company Beximco immediately started the process desperately to secure it (UKTI, 2010). Square, Beximco, Eskayef, Incepta and Acme are the top five manufacturers by sales and growth rate. Sanofi-Aventis ranked the top among the multinational pharmaceutical companies followed by GlaxoSmithKline. Sandoz took the third position

Sales of Square Pharmaceuticals, the market leader, were Tk 1,270 crore in 2010,Beximco grew faster than other companies at a staggering 33 percent in 2010 with Tk 523 crore sales.
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Business Strategies
Research and Development

The Research & Development (R&D) function plays a significant role in the Company achieving its aspiration for profitable growth. The R&D function contributes through its efforts on new product innovations, superior claims development and cost savings initiatives. Recently, the R&D function has adopted Open Innovation methodology, a platform for technology and innovation enhancement through use of internal as well as external ideas through external partnering. The Open Innovation team has already made great strides. Several successful external leads are being pursued across new product formats and high-science ingredients, which will help fast-track and deliver higher value innovations over the next couple of years.

Pricing Price is one of the most important factors that influence consumer demand, and hence sales revenue. Being a highly rated firm in the global pharmaceuticals industry, gsk sets the prices of its products carefully so as not to deter customers from buying the necessary medications and to reach its profitability targets. The company follows a very simple but a well-defined pricing strategy for deciding the price of their products. Emphasis on Supply Chain The company gives topmost priority to all the components of its value chain. Gsk realizes the fact that to deliver quality out, inputs of superior quality are necessary. As a result, the company keeps the quality of their product consistent by controlling the quality and price of the raw materials.

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Business Process
With opportunities in Bangladesh opening up, GSK Bangladesh is aligning itself with the parent company in areas such as clinical trials, clinical data management, global pack management, sourcing raw material and support for business processes including analytics. GSK's best-in-class field force, backed by a nation-wide network of stockists, ensures that the Company's products are readily available across the nation. GSK has one manufacturing units in Bangladesh. The company's products include prescription medication, vaccines, and consumer health products, though it manufactures products for many different therapeutic categories within these broad spaces. With dozens of potential drugs in the works, the company has a pipeline that includes twice as many late stage drugs as its nearest competitor. While each of these units is sizable, GlaxoSmithKline is especially dominant in the vaccine market, supplying roughly one quarter of all vaccines worldwide GSK plans growth in emerging markets- GSK is one of the most aggressive pharmaceutical companies when it comes to expanding its presence in emerging markets. The company's strategy includes scaling up its branded generics business, obtaining more government contracts for its vaccine business, and pushing more of its patented medications in developing countries.

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Corporate Governance
Companys Philosophy on Corporate Governance

The Companys philosophy of Corporate Governance is aimed at assisting the management of the company in the efficient conduct of its business and in meeting its obligations to stakeholders, and is guided by a strong emphasis on transparency, accountability and integrity. For several years, the Company has adopted a codified Corporate Governance Charter, which is in line with the best practice, as well as meets all the relevant legal and regulatory requirements.

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Corporate Governance Charter The board of Directors has adopted a CG Charter which is compiled with. The purpose of the charter is to codify the companys system of corporate governance so as to assist the top management in the efficient conduct of the business. Charter specifics: The relationship with other Group Companies The role of Board of Directors Important matters requiring the prior approval of GSK plc board or its committees Control of expenditure Professional advisor

Management and Conduct The board supports good Corporate Governance based on generally accepted framework. Compliance with statues governing the industry is of great importance to maintain the reputation of the company. Kay staff has been given specific responsibility to ensure compliance.

Audit Committee The Audit Committee reviews the financial and internal reporting process, the system of internal controls, the management of risks, and the external and internal audit process. The majority of members of the audit committee are non-executive directors of the company, headed by a nonexecutive independent director. Internal Control Framework The management recognizes its responsibility to present a balanced and understandable assessment of the companys position and prospect. The management has accountability for reviewing and approving the effectiveness of internal controls, operated by the Company, including financial, operational and compliance controls and risk management. The entire control system is subject to review by the Global Internal Audit of GSK on need basis, the report of which is reviewed by the Audit Committee of GSK plc.

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Risk Management
The Company perceives business risks both at local and global perspectives, guided by sophisticated risk management tools. The Company focuses its potential risk from many corners, like Legal and Compliance matters, Environmental issues and Quality issues. In performing the risk management activities the company has a complete and documented policy. In the policy three watchdogs have been identified to oversee the compliance matters, which are: i. ii. iii. Internal Audit EHS (Environment, Health & Safety) Quality Assurance

Remuneration Policy
Payment of Commission and Sitting Fees to the Non Executive Directors and payment of Salary, Commission and Perquisites to the fulltime Directors are made in accordance with industry norms and subject to the overall ceilings imposed by the Companies Act, 1956 and other applicable statutes, if any. The basis is also determined by carrying out an annual analysis of the industry trends by an independent and reputed HR Management Consultant firm which is scrutinized and recommended by the Remuneration Committee. Performance linked incentives and bonus paid to the fulltime Directors are determined on the basis of achievement of overall financial and other objectives set for the Company at the beginning of the year and the
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achievement of individual objectives. The retirement age of the Whole time directors of the Company is 60 years while for Non Executive Directors it is 75 years. The Notice period for the Whole time directors is three months' notice on either side. The Service contracts are in the range of 3 to 5 years.

Policy for Insider Trading The Company has a Policy for the Prevention of Insider trading in the securities of the Company. The policy applies to all persons connected or deemed to be connected (Directors, officers and employees of the Company etc.) with the Company who are required to comply with the same.

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Ratio analysis
In order to ascertain the possible problem areas for audit we computed financial ratios for GlaxoSmithKline BD and four of its competitors (Square, Beximco, Renata and Marico) for the year 2011. We then compared them with the industry average. Industry average 2.114204298 1.373466136 129.3070002 4.147603144 1.049341154 3.027397644 49.924649 46.30647595 5.822967922 5.943045268 144.7030048 40.52757194 20.65663828 14.58048484 14.44102572 23.69545904 23.04898136 135.0175488 47.8044616 27.49851822

RATIOS Current Ratio Quick Ratio Cash Conversion Cycle Inventory Turnover Ratio Total Asset Turnover Ratio Fixed Asset Turnover Ratio Average Collection Period Average Payment Period Debt Ratio Capital Structure Times Interest Earned Ratio Gross-Profit Margin Operating-Profit Margin Net-Profit Margin Return on Asset Operating Return on Asset Return on Equity Earnings Per Share Market to Book Ratio Price Earnings Ratio

Glaxo Marico Beximco Renata 1.114 2.5933869 2.2506346 2.463 0.414 1.6049949 2.0243358 1.674 56.042001 N/A 216.879 1.6723 0.3037 0.42757 46.18 47.5624 10.4716 10.7986 2.478 48.9 25.201 16.2 4.92 6.5834 7.653 6.95768 13.51 19.4176 N/A 1.856 0.99 1.668 93 N/A 2.7091 2.7922 14.938 52.74 28.478 16.72 16.49 48.785 28.65 471.06 7.8728 27.476 3.4373352 10.802381 1.6403015 1.4327023 9.3105097 2.4409075 N/A 46.518596 96.663504 19 3.7781496 5.286 3.8584433 5.286 675.09756 22.2928 34.20486 29.893 15.241341 14.108 11.293124 12.5993 18.524129 18.051 25.000395 20.21262 29.698201 30.753706 34.049619 21.432143 112.95952 68.87 33.175114 32.133977

Square 2.15 1.15 115 2.97 0.88 1.29 14 22 6.87 6.98 8.708183 36.9 20.25446 16.09 14.22 17.8956 18.49 141.59 35.81 25.29

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Time series analysis for GSK BD:

2007

2008 4.64084328 1.94210199 573877000 138.955329 2.93026017

2009 2.9606423 1.2274832 674459000 150.23973 2.3757466

2010 3.1090813 1.6864667 905127000 93.146533 3.4059031

2011 2.59338694 1.60499491 1120782000 56.0420006 3.43733522

Current Ratio Quick Ratio Net Working Capital Cash Conversion Cycle Inventory Turnover Ratio Total Asset Turnover Ratio Fixed Asset Turnover Ratio Average Collection Period Average Payment Period Gross-Profit Margin Operating-Profit Margin Net-Profit Margin Return on Asset Operating Return on Asset Return on Equity Earnings Per Share Market to Book Ratio Price Earnings Ratio Debt Ratio Capital Structure Times Interest Earned Ratio

6.6322906 1.4599262 573998000 168.66474 2.1933352

1.4237332

1.48726166

1.3859198

1.7770605

1.6403015

4.2958538 36.379216 34.12771 19.674185 -0.710949 -1.189571 -1.693631 -1.012202 -2.234134

4.71584839 65.4245543 51.0315433 21.560327 4.97530033 2.83483 4.21613396 7.39957341 5.63538856

5.490433 81.253606 84.649793 24.981291 11.26145 7.5710302 10.49284 15.607466 15.670624

8.2339972 49.428099 63.448443 31.229677 14.282601 10.708404 19.029481 25.381046 27.823493

9.31050968 46.518596 96.6635038 34.2048597 14.7462277 11.2931242 18.5241286 24.1882594 29.698201

-1.421332 3.73952523 11.866484 13.549943 19.4799175 33.00986

26.878211 34.0496191 72.509693 112.959522 26.977242 33.1751141 4.2232098 3.77814961 4.316488 3.85844334

-95.33313 52.0921742 27.817843 10.759532 6.73563152 5.1463356 11.132786 6.99419904 5.28613

-2.671104 17.2473822 25.231755

519.68592 653.167073

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Ratio Interpretation:
Liquidity Position: The liquidity position of GSK BD is very good. Both the current and acid test ratio of the firm is still above the industry average and although it has decreased from the year 2010. The current ratio rose because of the increase in cash balance. And the quick ratio rose because of the fall in inventory level. Therefore the firm will be able to pay off its creditors easily when payments are due. Efficiency Ratios: Apart from the inventory turnover ratio, all the efficiency ratios of Heidelberg are better than the industry average. Some of these ratios have also increased from the previous year. So the firm is using its assets efficiently to generate sales. Thus sales have increased. However, their average collection period is lower than the industry average, this means they have to work on their accounts receivables policy so that accounts receivables are received on time. Profitability Ratio: The profitability ratios of the firm are lower than the industry average, but they are higher than the previous year. The return on equity (ROE) with a value of 29.69% is higher than the industry average of 23%. Other than this, all the profitability ratios indicate that GlaxoSmithKline BD is not performing at a satisfactory level compared to industry average. Debt Ratio: The firm is less dependent on debt compared to other firms of the industry. It has also reduced its dependency on debt over the years. 3.77% of its assets are financed by debt, compared to the industry average of 5.82%. They reduced their debt and increased equity to give the capital structure a much more strong shape. They should also be careful about cash inflow as interest can only be repaid through cash not through accounting income. Overall their policy regarding debt management is good. Market Ratio: The average liquidity position, profitability, efficiency and debt ratio has not earned the public confidence. This has been reflected in the stock market as the share price has been in a downward trend for last few weeks, although there are other matters involved. However, it should be noted that the Industry average for EPS has been boosted by abnormally high EPS of Renata. Considering other competitors, especially markets 2nd position holder Beximco, we can say that GSK BD is in a satisfactory position.
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POSSIBLE MISSTATED RATIOS:

Cash Conversion Cycle- the Cash conversion Cycle has dropped significantly from 93 days in 2010 to 56 days in 2011, whereas the industry average is 129 days. The auditors need to check that if any kind of material misstatement has been made to make the figures attractive. Gross and operating profit margin- From the year 2010 to 2011, the gross profit margin has risen from 31% to 34%. However the net profit margin did not raise enough to reflect the rise in gross profit margin. It rose from 10.7% to 11.29% in 2011. The auditors need to find the reason. One reason could be excess expenditure, so the auditors need to find whether any kind of fraudulent activity was committed by the employees that are causing the rise in expenses. Fixed Asset Turnover ratio- The industry average for this ratio is 3.02, whereas GSK BDs ratio is 9.31. It has also increased from last year. This means that GSK is producing more revenue per unit of fixed asset for every taka worth of sales. Auditors need to check whether misstatement was made in fixed assets amount or not. Operating Return on Assets- The value of operating return on asset is also significantly greater than that of the industry average, so auditors need to cross check the authenticity.

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MAJOR RISKS:
Changes in the competitive environment: Bangladeshi Pharmaceutical industry is a very fast growing industry with a scope to grow further. Although the industry is often termed as a Oligopoly, increased number of newer and smaller companies may break the trend and increase competition in the market. Political Instability: The risk of political instability is very high in Bangladesh. This may anytime bring interruptions in the proper flow of the operation of GSK BD. Risk of exchange rate fluctuation: There is always the risk of the exchange rate fluctuations. This brings an uncalled effect on both the cost and the ultimate price of the medicine as some of the raw materials are imported from abroad. Interest Rate Risk: Changes in the borrowing rate may hamper the expansion projects of GSK BD to a halt. High inflation: A similar situation may also occur due to high inflation. The product price will be higher, making it less competitive in the international market. Irrational duty and VAT structure: The government of Bangladesh may impose irrational duty and VAT structure on cement and other foreign countries may also increase the import duty on cement in which case it would be difficult to tackle the cements price and import it to countries abroad. Increased price of raw materials in the in the international market: Most of the raw materials for making composite cement are imported from abroad. Thus if the price of the raw materials increase then the overall cost and price of the products would increase making it less competitive in the international market. Risks arising from the business strategy of GSKBD: Marketing strategy- The Company usually allocates a huge amount of fund for their promotional campaign. So it may be difficult for them to monitor all the activities. As a result employees of the marketing department may engage in frauds to achieve personal gains. Promotional tools like billboards, advertisement and events create opportunities for the employees to misuse funds for personal gains. Operational risk- It is defined as the risk of loss resulting from inadequate or failed internal processes, people, and systems, or from external events. Risks arising from the business process of GSK BD: Receipt by checks - GSK does not receive cash for their sales. They accept checks. This might be risky because checks might bounce. In those cases, they will miss out on sales revenue. Low volume of credit sale- The low volume of credit sale may reduce their sale. Since customers may not be able to buy with cash all the time. So GSK will lose their customers to the competitors.

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Use of ERP- Using and relying too much on software will expose them to risk of cyberattack. Hackers may hack the system to steal valuable information which may be quite strategic. They may also steal funds since the ERP of GSK is connected to the banks. To make the matter worse, there are not sufficient laws in Bangladesh against cyber-crime.

Implications of the Risks for the conduct of the Audit:

Changes in the competitive environment: The auditors need to be assured that the company has proper knowledge about the changing market situation and has a contingency plan to recover. Exchange rate risk: The auditor will have to identify and evaluate the policies taken by the company to reduce the exposure to the risk of the exchange rate fluctuation. They will also have to analyze how the company reports the impact of the exchange rate fluctuations in the financial statements. Inflation: The auditor will have to identify and evaluate the how the inflation level affects the business policies, decisions and sales. They will also have to check whether the items reported in the financial statements are consistent with the prevailing inflation rate in the country. Political Instability: The auditors will have to see whether or not the company has any contingency plan to tackle the adverse impacts of political instability. They will also need to understand the vulnerability of the industry to political instability and how they affect the operations of GSK BD. Imposition of tax: The auditors should look for any kind of misstatements or fraud by the company to reduce tax liability.

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Conclusion
GlaxoSmithKline- A Multinational Company, with its core product being medicines, aggregates and related activities, is one of the leading producers of pharmaceuticals materials worldwide. It meets a good amount of the Bangladesh demand for medicines from the plant located at Chittagong. All the ratio analysis along with the Trend Analysis shows that the company is in a good position from all perspectives, which is gradually developing day by day. The auditors should try to maintain global standards in their audit procedures which complements the standards followed at GSK rest of the world. The auditors need to delve into this matter. But overall, the companys internal control system is strong. Therefore, the auditor must focus on testing internal control and developing corroborative evidence on account balance.

We recommend investing in the stocks of this company to common investors.

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Reference: Gillespie, A. (2010) Business Economics, Oxford University Press.

Web Reference: Retrieved from: http://www.gsk.com.bd/annualreports http://www.continuitycentral.com/news02108.htm http://bddrugs.com/detail.php?nid=13 http://www.mkazi.net/article-novartis-bangladesh-pharmaceutical-marketplaceanalysis.aspx#_Toc273314481

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