Right now I’m looking at some of the most popular companies in the FTSE 100 to try and establish whether or not they have the potential to push profits up to levels not seen in the last few years.
Today I’m looking at GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) to ascertain if it can make £7bn in profit.
Have we been here before?
A great place to start assessing whether or not Glaxo can make £7bn in profit is to look at the company’s historic performance. Unfortunately, Glaxo has not been able to make £7bn in profit at any point during the past five years, although it is possible that the company will be able to reach this target in the near future.
Indeed, looking at data from the past five years, Glaxo’s most profitable year was during 2009 when the company reported a net income of £5.5bn. However, due to the fact that the company has lost the exclusive manufacturing rights to a number of key treatments during the past few years, Glaxo’s earnings have been unable to exceed this high water mark.
Further, last year it was revealed that Glaxo had been bribing Chinese doctors to prescribe its treatments, which has had a dire effect on the company’s sales within the country. Glaxo’s sales within China have more than halved during the past year.
But what about the future?
Of course, whether or not Glaxo can reach my profit target is entirely dependent upon the company’s treatment pipeline; the number of products the company has coming to market over the next few years. In particular, with sales of existing treatments being undercut by low-cost alternatives, Glaxo has to keep its offering fresh in order to drive sales higher.
Luckily, it would appear that Glaxo’s pipeline is fully stocked and the company is primed for growth. Glaxo had five new treatments approved for sale during 2013 and a further 40 are in late stage development. In comparison, Glaxo’s major London-listed peer, AstraZeneca does not have any new treatments coming to market until 2016.
This landslide of new treatments, if successful, is bound to add a boost to Glaxo’s bottom line and with a net profit margin of around 20% investors should reap the benefits. Glaxo reported a net profit of £5.5bn for 2013, which puts my profit target of £7bn in sight.
What’s more, I feel that Glaxo’s mistakes within China will soon be forgotten and the company’s sales will return to growth in this important market.
Foolish summary
All in all, if Glaxo can get its multitude of treatments currently under development to market without any further mistakes, then I feel that the company can make £7bn profit.
