Glaxo to benefit from likely revision in formulation price
The National Pharmaceutical Pricing Authority (NPPA) is likely to revise (upwards) the prices of betamethasone (‘Betnovate’) formulations. The decision, if it materialises, would come into force within six to eight weeks.
Glaxo India is a 51% subsidiary of the £ 8 billion Glaxo Plc. UK which has blockbusters like Zantac and Zovirax to its credit. It has two other group companies Burroughs Wellcome India and Biddle Sawyer. The company has almost 60% of its revenues accruing from products, which are under price control and betamethasone formulations account for a fourth of such revenues.
The NPPA was set up in 1997 as the official body to administer the Drug Price Control Order (DPCO). It announces price revisions almost every month. Most of the times the recommendations do affect the multinational pharmaceutical companies since they are the ones which have a relatively higher proportion (anywhere between 45-60%) of the revenues accruing from products under price control.
Glaxo would be among the largest beneficiaries of an upward revision in Betamethasone based formulations since these account for around 15% of its turnover. The companies Betnovate-C and Betnovate-N brands enjoy a market share of 35% and 45% respectively and both have grown at a rate of 10% in recent times much higher than industry rates of 7-8%.
This makes it apparent that the company’s profitability is artificially depressed and depends on the whims and fancies of the NPPA. As and when the DPCO (which has 76 drugs under its ambit) is liberalised (around 15 drugs are supposed to be under price control post liberalisation) the profitability of Glaxo would improve substantially.
Most analysts have rated Glaxo as a buy for three reasons. Firstly, on account of the parent’s product pipeline post its merger with Smithkline. Second the fact that Glaxo India has not followed minority shareholder unfriendly policies such as setting up a 100% subsidiary or payment of hefty royalties to the parent. And third, the company has substantial cash in its balance sheet that can be used for future acquisition as the Indian pharmaceutical sector witnesses a consolidation.
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