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An opportunity in adversity... - Views on News from Equitymaster
 
 
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  • Apr 3, 2000

    An opportunity in adversity...

    Glaxo India is the 51% subsidiary of the world's largest pharmaceutical company Glaxo-Wellcome Plc. The 8 bn parent has proposed a merger with Smithkline Beecham which is expected to be in place by July 2000.

    Glaxo India has equally impeccable credentials. A presence in a large number of therapy areas (over 60% of the market), a market leader in 80% of the segments in which the company operates and a large portfolio of over 200 product packs. Besides, the company enjoys the trust of the medical profession. Its prescription brands such as Betnovate (dermatologicals), Zinetac (ranitidine), Becadexamin (vitamin) Cetzine (anti-histamine) are as well known as over the counter products in their own rights. The company has a clean balance sheet and a first class management.

    The company however seems to be caught in a cleft stick. Not of its own making though.

    First, of all the Indian pharmaceutical formulations market itself has slowed with growth down to single digits of around 7-8%. This was primarily since antibiotics, vitamins and cough and cold remedies dominate the Indian market with almost one-third share and a slowdown in these has led to an overall slowdown. Glaxo has bettered the market though with an almost 11% growth.

    What the company has been battling with is the after effects of the rampant trade offers and price cutting, which its competitors are making. This would imply that any stockist/wholesaler who would normally stock drugs for around 15-20 companies would have built up relatively higher stock levels reducing the primary sales to a trickle. Besides, quite a few companies have been offering competing products in the non-branded generic market which are discounted for the trade at much higher levels than for the consumers.

    The second major leash for the topline growth is the fact that the company derives almost 60% of its revenues from products under price control. Some of its major brands such as Zinetac and the Betnovate range are under price control and the management does not envisage a wholesale modification to the drug price control order in the near future.

    Another factor holding back both topline and bottomline growth is the delay in the legal merger of Burroughs Wellcome (BWIL). Glaxo has not been able to consummate this, as the staff at BWIL's Mulund plant has refused to accept Glaxo's lower wage scales. BWIL has a much older portfolio of products than Glaxo but since most of it is out of price control the company reports better return ratios than Glaxo. However, a legal merger with Glaxo seems to be still sometime away.

    Glaxo's recent results are reflective of these factors. The company has registered a 11% fall in the net profit (to Rs 770 million) despite the increase in the topline by around 11% (to Rs 8555 million).

    (Rs m) CY99 CY98
    Net Sales 8,855.0 7,938.4
    Other Income 452.1 347.8
    Profit on sale of property 218.7 195.0
    Total expenditure 8,215.2 7,052.7
    Interest 99.0 86.3
    Depreciation 162.1 141.9
    PBT 1,049.5 1,200.3
    Tax 278.9 334.0
    PAT 770.6 866.3
    Equity 597.8 597.8

    However, is one were to judge the company's performance in the light of the industry slowdown it is actually quite creditable. The company's costs increased during the year due to the increase import duty of its imported bulk drug cefuroxime axetil. This bulk drug is used for the manufacture of Ceftum, an antibiotic, which contributes around 4.5% of the company's turnover. This is the reason for the decline in the profits. The coming year is however expected to be better. For one, the company is likely to benefit to the extent of the around Rs 80 million from the upward revision in the prices of the Betamethasone range in the current year.

    Glaxo's growth in the future could be driven by its impending amalgamation with SmithKline. As far the Indian operations are concerned the merged company with a market share of 7% will be way ahead of competitors Cipla and Ranbaxy. The merged company will have brands such as Iodex, Augmentin (an amoxycillin-clavulanic acid combination), Engerix (Hepatitis B vaccine), Zevit and Livogen (vitamins and minerals), which will complement its prescription led product profile. The merged entity will also command an enviable marketing network that will go a long way in its attempt to increase market share.

    Glaxo has posted a mixed performance over the last two year's. However, the pending mergers with Burroughs Wellcome and SmithKline Beecham and its recent attempts to restructure its operations have the potential to rev up its performance in the coming year's.

     

     

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