Sample credit memo for GlaxoSmithKline with Pfizer as the competitor




Abstract                                                                                   Page 2

Introduction                                                                            Page 3

GSK Historical Credit Analysis                                            Page 3

PFIZER Historical Credit Analysis                                      Page 4

Credit Risk of GSK                                                                  Page 5

GSK Creditworthiness                                                            Page 6

Projection                                                                                Page 6

Summary                                                                                 Page 8

Notes to The Accounts                                                           Page 10

References                                                                                Page 11




Table 1               GSK Historical Credit Analysis                         Page 8

Table 2               PFIZER Historical Credit Analysis                    Page 9



Creditworthiness is a check undertaken by lenders to ascertain the likelihood of borrower failing in their obligation to settle the debt as agreed. Credit memo is a primary means of communicating the credit risk of an organization (Jeffery., 2015; Feschijan., 2008).

The purpose of this study is to ascertain via historical analysis, the credit risk and credit worthiness of Glaxosmithkline Plc. There are however many factors or mitigants to credit risk which include competition. It is in view of this, we compared GSK with Pfizer. Further in this study is a 3-year projection of the company. Years analyzed covered 2012 to 2016.

To effectively analyze the credit risk of GSK, we put into consideration the basic credit metrics; operation performance, liquidity and access to market, cash flow trend and debt maturity/capital structure. Financial ratios are interpreted to establish the creditworthiness of the company.

Major findings are that GSK has history of low credit risk but that weakened in 2013 and is thereby required to reduce its net debt. It also experienced decrease in sales and cash flow due to its corrupt operation in China, pricing pressure and generic competition in Europe. Pfizer was found to have stronger liquidity and debt/equity ratio than GSK, though it also suffered decrease in sales. Pfizer is also more cost effective in its operation.

In conclusion, GSK is likely to drop in its A1 to A2 Moody’s credit rating if it doesn’t stabilize in credit metrics.


     History of Glaxosmithkline Plc

GSK, a London-based pharmaceutical company with head office in Brentford, was formed in December 2000 as an amalgamation between SmithKline Beecham and Glaxo Wellcome (Abbott., 2000). In 2015, its global rating among other multinational companies in the sector was sixth after big names like Pfizer, Merck, Novartis, Sanofi and Hoffman-La Roche and Sanofi. GSK is primarily listed in London Stock Exchange (LSE) and also a second listing in New York Stock Exchange. GSK was rated fourth largest in August 2016 with market capitalization of £81 billion (Gent., 2013).

Company’s Products/Services

As a reputable healthcare firm, GSK is science-led and driven by an obligation to inspire people to greater achievements, improve their living standards and thereby extending their life span. Its three operational segments are: pharmaceuticals, vaccines and consumer healthcare, with focus on other six research areas namely: Respiratory diseases, Oncology, Human Immunodeficiency Virus (HIV) infectious diseases, Vaccines, Immuno-inflammation and Rare diseases (op cit.; Kollewe., 2017).

GSK’s top earners are drugs and vaccines namely: Flovent, Advair, Lovaza, Augmentin, Avodart and Lamictal. Top among its consumer products are Aquafresh toothpaste, Nicoderm, Horlicks, Sensodyne and Abreva.

GSK Revenue

GSK Revenue as at 2017 was £30.19 billion (Dow., 2018)

GSK Workforce

The company has around 100,000 employees (Elaine and Kevin., 2018).

Achievement and Failure

GSK produced its first vaccine for malaria in 2014 and the company’s legacy products include “Essential Medicines” like Amoxicillin, Zidovudine, Mercaptopurine and Pyrimethamine, which are denoted in the list of Essential Drugs of World Health Organisation (George., 2018; Benson., 2018).

However, GSK faced legal issues in 2012 following charges on promoting medicines for unapproved consumptions, including bribes offered to medical practitioners in the U.S. and failure to follow existing guidelines on reporting safety data. The company pled guilty and was ordered to pay a total of $3 billion (approximately £1.9b) as settlement. This amount remains the highest ever paid by a drug manufacturing company.


  1. Operating Performance: In 2013, though GSK recorded no sales growth in revenue, its performance was better compared to Pfizer which experience 6% decrease in its revenue.


From the above tables, GSK cost structure is higher than Pfizer. It achieved 1% reduction in SG&A in 2013 but should engage cost reduction strategies in subsequent years or it stands the risk of not having free cashflow. Comparing GSK’s EBITDA margin with Pfizer’s suggest that the latter is more cost effective. Therefore, GSK needs to cut down cost.

The absence of growth in revenue is due to some mitigants which challenges the credit worthiness of the company.

  1. Liquidity: In 2013, GSK’s liquidity skyrocketed from negative to positive, with an available £1.1 of its existing asset readied to meet its current liabilities which stand at £1.0. Nonetheless, its competitor Pfizer has a stronger liquidity valued at $2.4 of its existing asset squared to counter its current $1.0 liabilities. An analysis of GSK’s liquidity shows it has low credit risk (Table 1).


  1. GSK also has access to undrawn credit facilities comprising, first, a $2.5 billion-worth of 364-day committed bilateral facilities (all having a one-year term-out option) maturing in September 2013; and secondly, £2 billion equivalent of 5-year multi-currency pledged bilateral assets that matured in September 2017. The facilities contain no financial covenants. These also serve as backup to the group’s $10 billion commercial paper programme.


  1. Cash flow Trend: GSK moved from a deficiency in net cash flow to surplus in 2013, doing excellently well than its competitor Pfizer which moved from a free cash flow in 2012 to a deficient cash flow in 2013. However, Pfizer cash flow constitutes more of its revenue than GSK.


  1. Debt Maturity/Capital Structure: GSK gross debt outweighs its EBITDA which increases its credit risk but has a payback period of 3years with its long-term debt ranging between 2-5years maturity period. The higher the credit risk, the higher the interest rate and the lower its creditworthiness. However, it has enough cash to pay its short-term debt which matures in a year.



GSK China experienced a 30% drop in sale revenue soon after the corruption charges (Adam and Ben., 2014). The company was found guilty and fined nearly $500 million, which affected its cash flow. The drop-in products sales ranged from sixty-one percent in vaccines and twenty nine percent in consumer health products, which was gaining enormous market share (Jack., 2013).

The company is being investigated in other countries. Finding it guilty will have adverse effect on its future sales and cashflow and also its creditworthiness (Wong., 2017).

GSK confirmed in 2013 that its EBITDA decreased by 1%. The company’s pharmaceutical and vaccines recorded sales growth which was, however, partially balanced by pricing pressure and generic competition in Eurozone, where it admitted sales were fixed compared to data from year 2012.

Also, sales from respiratory products in Europe fell by 3%, which shows increased competition several markets.


Projection is based on the summary which explains GSK is unlikely to achieve an upgrade in credit metrics in the short term as it will take 12-18 months. Therefore, 2014 and 2015 projections put into consideration the need for stability. There is the assumption that the company will reduce its borrowing and increase its repayment as this is needful for a strong business profile and better credit rating.

We also assume there will be significant sales growth in 2014-2016 and the cost structure should reduce in percentage to revenue. The projection is targeted to strengthening liquidity position and increase free cashflow. There is also the assumption that equity will increase thus strengthening the debt/equity ratio to survive the competition with Pfizer.

Findings show that one of the core drivers of existing research-based pharmaceutical companies is production of new drugs serving unfulfilled medical needs. Research and development (R&D), also understood as “input,” is the acceptance and release of new medicines into the market (output). This is an important aspect of the industry that requires efficiency considering the fact that the level of monetary investments required for R&D has decreased in supply for decades. According to Schuhmacher (2016), many big names in the pharmaceutical industry will achieve high productivity level in R&D through investments in groundbreaking innovations. On this backdrop, the company should embrace innovation by developing better new products based on historical cost routed towards research and development to gain competitive advantage and increase sales/earnings.

All assumptions are made for GSK to regain stability of credit rating, maintain low credit risk and have more access to the market at low interest rate (Conner., 2015).



Glaxosmithkline is creditworthy but likely to drop in rating from A1 to A2 according to Moody’s credit rating. It is required GSK reduces its net debt. “An upgrade is unlikely in the short term, but upward pressure could be exerted on the rating as a result of a combination of improving credit metrics (well in line with the A rating category, as defined by our Global Pharmaceutical Industry rating methodology) and a continued strong business profile. Conversely, downward pressure could be exerted on the rating if GSK’s credit metrics weaken further or do not recover within 12-18 months to the levels expected for the A1 rating”. (Nichols., 2017).




The following figures were extracted from GSK Annual Report analysis on its website.

Table 1

S/N CATEGORY 2012 2013
    £’m £’m
  Revenue 26,431 26,505
  Sales Growth %   0%
  EBITDA 11,162 10,854
  EBITDA Margin 42% 41%
  Cost Structure:

a. Selling, General & Administrative % Revenue

b. Research and Development % Revenue

c. Depreciation & Amortization as % of Revenue









  Working Capital (Current Assets – Current Liabilities) (123) 1550
  Current Ratio (Current Assets/Current Liabilities) 0.9 1.1
  Net Operating Cash Flow 4,375 7,222
  Net Cash flow (1,607) 1,473
  Net Operating Cash Flow % Revenue 16.6% 27.2%
  Debt Ratios:

Gross Debt/EBITDA


Total Debt/Total Equity

Debt Payback Period












Source: GSK Annual Report 2013, pp. 134-137, 158, 161; Credit Risk-Excel Output




The following figures were extracted from Pfizer annual report analysis on its website.


Table 2

S/N CATEGORY 2012 2013
    $’m $’m
  Revenue 54,657 51,584
  Sales Growth %   -6%
  EBITDA 36,584 33,424
  EBITDA Margin 66.9% 64.8%
  Cost Structure:

a. Selling, General & Administrative % Revenue

b. Research and Development % Revenue

b. Depreciation & Amortization as % of Revenue









  Working Capital (Current Assets – Current Liabilities) 35,645 32,878
  Current Ratio (Current Assets/Current Liabilities) 2.22 2.41
  Net Operating Cash Flow 16,746 17,765
  Net Cash flow 6,899 (7,898)
  Net Operating Cash Flow % Revenue 30.6% 34.4%
  Debt Ratios:

Gross Debt/EBITDA


Total Debt/Total Equity









Source: Pfizer Financial Report 2013, pp. 18, 45, 58




EBITDA = Gross profit – SG&A + Amortization (charged for the year) + Depreciation (charged for the year)

2012 = 18,506 – 8,789 + 871 +574 = 11,162

2013 = 17,920 – 8,480 + 732 + 682 = 10,854

Historical Chart of GSK is a sheet in the excel.



EBITDA = Revenue – COGS –SG&A + Amortization + Depreciation

2012 = 54,657 – 9,821 -15,171 + 5,109 + 1810 = 36, 584

2013 = 51,584 – 9,586 -14,355 + 4,599 + 1,182 = 33,424

Total Debt = short term debt (including current portion of long term debt) + long term debt

2012 =6,424 + 31,036 = 37, 460

2013 = 6,027 + 30, 489 = 36,489

Net debt = total debt – cash

2012 = 37,460 – 10,081 = 27,379

2013 = 36,489 – 2,183 = 34,306




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