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GSK Pharma: Research meet extracts
Jun 14, 2006

We met the management of GSK Pharma last Friday to understand the initiatives taken by the company in the last one-year and the future prospects. Here are the key takeaways.

What is the company's business?
Glaxo is the largest pharma company in the Indian market with a share of 6.5%. It is a 49% subsidiary of the US$ 33 bn Glaxo Group, the world's second-largest pharma company with an R&D war chest of US$ 4 bn. Glaxo's product portfolio boasts of some of the leading brands like Augmentin, Zinetac, Betnesol, Cobadex and Zevit in the domestic pharma market. The company underwent a restructuring exercise and effect of the same was evident in 2003 and 2004. It derives its revenues from pharmaceuticals and fine chemicals. In May 2006, the company sold off its animal healthcare business to a European company ‘Virbac’.

On its product portfolio: GSK Pharma’s product portfolio is classified into three categories viz. ‘priority products’ (30 brands), ‘priority others’ and ‘scheduled products’. The contribution of these 30 priority products, which was around 30% three years back, increased to 47% in CY05. These products registered a 25% YoY growth in CY05, while the scheduled products (products under price control) recorded a 16% YoY growth.

As far as new product launches are concerned, GSK Pharma had launched 13 products in the last three years, which contributed around 6% to total revenues in CY05. New product launches in CY05 included four in-licensed products and an anti-diabetic product ‘Windia’ and ‘Windamet’ from its parent’s folio. Plans on the anvil include the launch of a cardiovascular product called ‘Cardevilol’ in alliance with Roche in CY06. Besides this, the company is aiming to launch atleast three to four new products every year. As far as patented products are concerned, the company will start launching them CY07 onwards. These products include ‘Lapatinib’ (anti-cancer) and two vaccines.

On vaccines: The vaccines market in India is pegged at Rs 3 bn and GSK is the market leader having cornered around 33% of this market. In CY05, vaccines contributed 6% to the company’s total revenues. Two major product launches in the vaccines segment include ‘Rotarix’ (for childhood diarrhea) and ‘Cervarix’ (for cervical cancer). The company plans to launch ‘Cervarix’ in the Indian market in mid CY07 and ‘Rotarix’ by mid CY08. It must be noted that the manufacture of vaccines involves different technology or process as compared to other ‘chemical’ drugs, as they are largely biotech products. The company has a vaccines manufacturing facility in Nashik, which will be operational in CY07 and cater to the worldwide requirements of GSK Plc.

On clinical trials: Currently, GSK Pharma is conducting around 10 clinical trials in the country on behalf of its parent. While the company does not perceive this as a commercial opportunity, conducting these trials helps to strengthen presence amongst the medical community and also gain relevance to its global parent.

On its animal healthcare business: The company recently sold off its animal healthcare business to a European company ‘Virbac’ for a consideration of Rs 2 bn. The decision to sell was prompted by the fact that the company had not been investing in new product research in this segment. This move was also in line with the company’s strategy to focus on its core pharmaceuticals business.

On operating margins: GSK Pharma’s CY05 operating margins were 29.1% and the company expects to maintain margins at these levels through an improved product mix, increased sales and reduction in costs.

On the DPCO: GSK Pharma has acknowledged the fact that the DPCO’s policy of price control could be detrimental to the Indian pharmaceutical industry and GSK’s business going forward. That said, the policy has yet to be announced by the Government and till such time, the impact of the same cannot be gauged. As mentioned earlier, GSK Pharma has also been focusing on improving its product mix by focusing less on products under the DPCO cover. This is highlighted by the fact that 30% of the company’s products are under the DPCO cover as against 44% about 4 years back.

On its attrition rate: GSK Pharma currently has a staff of 4,016 employees including 1,800 sales representatives. The attrition rate amongst the sales force is in high single digits and for the entire organisation the rate is not more than 3%.

What to expect?
At the current price of Rs 951, the stock is trading at a price to earnings multiple of 19.7 times our estimated CY07 earnings. Glaxo has been focusing on its power brands and these are expected to contribute to revenues going forward. The company will soon be launching products in the cardiovascular, CNS and diabetes segment either through the in-licensing route or through its parent’s product portfolio. The company is planning to increase activities on the clinical trials front, which shows that the Indian subsidiary is high on the parent’s radar. We shall soon update our research report on the company.

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