A look at the operating performance graph of GSK for the last five years would explain the reason for a complete restructuring exercise undertaken by the company last year. While operating margins had taken a dip, sales had started showing signs of stagnation. Saddled with excess manufacturing facilities, labour force and low margin products, the leader was losing its hold in the market.
After a year and a half of restructuring, GSK now seems to be lean, thin and rejuvenated organization with one clear mission statement in mind "Grow profits faster than sales and retain market leadership". The company has set itself the target of doubling its margins over the next three years.
To achieve this target the company seems to be banking on a three-pronged strategy. Focus only on key brands and therapeutic segments, challenging the existing cost structure by exploring every possible cost rationalization strategy and leveraging on the marketing strength created over the years. The restructuring in terms of revenue rationalisation with an aim to improve margins is more or less through and the company is now in the midst of targeting costs across the entire spectrum. This would be achieved through increasing outsourcing, efficient procurement and organizational streamlining.
After the merger with SmithKline Pharma, GSK has a very wide product portfolio covering a broad spectrum of therapeutic segments. The merged entity will target vaccines, dermatology, anti-infective and respiratory segments. We believe that vaccines would be a key area of growth for GSK. The company has several combinational vaccines where it enjoys monopoly position in the market. Even as far as other vaccines are concerned, the company’s products are priced at a premium compared to its peers.
The product portfolio of the company has been rationalized and promotional resources would now be committed to only ‘strategic’ brands. It has reiterated its commitment to focus on recent launches where the company sees a huge penetration potential. The company’s product portfolio boasts of some leading brands in the pharma industry like Iodex, Zinetac, Septran, Betnesol, and Cobadex etc. The company enjoys brand equity among physicians coupled with an enviable distribution network.
With little more than 50% of it’s sales coming from DPCO controlled products, the company is expected to be beneficiary of the current DPCO dilution. According to the new DPCO guidelines, Zinetac, Cobadex, Septran and Zevit are expected to come out of price control. This represents 15% of the total turnover of the company. However, Ceftum, its cephalosporin brand is expected to come under DPCO control, which represents around 5% of the company’s sales.
Sensing the turnaround in financials, GSK stock has already seen a sharp rise in the last month. Valuations going forward may further improve as the company’s targeted efforts translate into bottom line growth for the company. Operating margins of the company have already shown an encouraging rise in the last quarter of FY02 and we expect a sharp spurt in margins in the current year. We expect GSK to record approximately 17% operating margins, a rise of more than 700 basis points.
Further, we expect huge receipts to the company from sale of its (and its subsidiaries) excess properties. Since the company doesn’t have any expansion plans on the table currently, we expect huge one time dividend (in the range of Rs 50-55 per share) to shareholders from the sale of these properties.
Having said that, we believe that the growth in the long term would be constrained by lack of new product introductions. Though the company’s product portfolio boosts of some very strong brand names in the Indian pharma market, the fact is that its portfolio is quite mature and faces stiff competition from domestic companies. At best, the company expects to grow inline with industry growth rates (7-8%), which in itself is not very attractive. To summarise, the restructuring benefits of the company are likely to translate into improving valuations in the short run, however, in the long run, concerns over growth remain.