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GSK Pharma: Where to from here? - Views on News from Equitymaster
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  • Jun 15, 2005

    GSK Pharma: Where to from here?

    Glaxo announced disappointing 1QCY05 numbers much in line with its peers in the industry. In the following article, we take a look at how the company has performed over the years and future prospects.

    About the company
    Numbers at a glance...
    CY02 CY03 CY04 1QCY05
    Net sales growth (%) 3.7% 4.4% 25.9% -23.1%
    Operating profit margin (%) 16.5% 22.7% 28.0% 25.7%
    PBT margin (%) 18.8% 26.0% 30.4% 29.3%
    Net profit margin (%) 9.4% 15.8% 24.2% 17.0%
    Net profit growth (%) 123.5% 75.7% 93.2% -26.6%
    GSK India is the largest pharma company in the Indian market with a share of 6.5% (December 2004). It is a 49% subsidiary of US$ 37 bn Glaxo group - the world's second largest pharma company with a R&D war chest of US$ 4 bn. GSK India's product portfolio boasts of some of the leading brands like Augmentin, Zinetac, Betnesol, Cobadex Forte and Zevit in the domestic pharma market. Most of the company's products face stiff price competition from domestic players. The company underwent a restructuring exercise and effect of the same was evident in 2003 and 2004. It derives its revenues from pharmaceuticals, animal healthcare and fine chemicals. In 2004, it successfully merged Burroughs Wellcome India with itself, after a long wait.

    Performance over the years
    CY02: Topline registered a sluggish 4% YoY growth. Though the pharma business recorded an 8.5% growth, which was in line with the industry trend, the allied businesses registered a decline of over 7% in revenues, leading to a staid topline growth. However, it must be noted that the company's efforts to reduce costs and thereby improve operating margins from 10% to 16% augured well for the company, negating the impact of sluggish revenues. Raw material costs and other expenses dropped by 5% YoY and 3% YoY respectively.

    Cost break-up
    (% sales) CY01 CY02 CY03 CY04
    Raw materials consumed 52.6% 48.0% 45.2% 42.9%
    Staff costs 13.0% 12.5% 11.9% 10.5%
    Other expenses 25.5% 23.8% 21.1% 18.6%
    The management also made a decision to concentrate on its top 30 brands in a bid to boost its profitability. Also, the company's decision to close down unviable plants and sell property of the erstwhile SmithKline led to a drop in its depreciation provisioning. Consequently, bottomline soared by 123% YoY. However, if one were to exclude the effect of the extraordinary items, bottomline actually grew by 70% YoY.

    CY03: During the year topline registered a 4% YoY growth. This topline growth was mainly driven by the pharmaceuticals business which grew 6% YoY. The company's strategy of focusing on 30 priority brands (including brands like 'Augmentin') ensured that these products registered a double-digit growth and consequently, boosted the revenues of the pharma business. Another growth driver was the company's vaccines range where it rolled out a concept of 'Famili Vaccines', an immunisation awareness initiative.

    Peer comparison
    December 2004 Glaxo Pfizer* Aventis Ranbaxy
    Net sales growth (%) 25.9% 17.5% 12.8% 13.0%
    Operating profit margin (%) 28.0% 11.8% 29.2% 18.9%
    Net profit margin (%) 24.2% 8.2% 20.2% 12.9%
    * November 2004
    The company also focused on enhancing its operational efficiency, which was reflected in the rise in the operating margins from 17% to 23%. Raw material costs and other expenses (as a percentage of sales) registered a decline of 2% and 8% respectively. This was consequently reflected in the bottomline which rose by 51% YoY. The improvement in the margins would have been better but for the fact that the National Pharmaceuticals Pricing Authority (NPPA) revised downwards the prices of Ranitidine formulations in September 2003. This affected the margins of Zinetac, one of the important products of Glaxo.

    CY04: Revenues clocked a robust 26% YoY growth. However, it must be noted that during the year, the company merged Burroughs Wellcome India with itself, which contributed around 14% to Glaxo's revenues. If Burroughs is excluded, then the revenues grew by 8% YoY. The company's pharma business (84% to revenues in CY04), grew by 8.7%, beating the industry growth rate of 6.4%. The growth was led by the company's continued focus on power brands. As far as the other businesses are concerned, animal health business grew by 7% and the fine chemicals business grew by 5.5%.

    Operating margins showed considerable improvement from 23% to 28% on the back of increased contribution from power brands as well as lower marketing, sales promotion and administrative expenses. This was also reflected in the bottomline which jumped 93% YoY. However, the sharp rise in the bottomline was also due to the extraordinary income fillip during the year to the tune of Rs 670 m, which was on account of sale of its Worli plot.

    What to expect?
    At 768, the stock is trading at a P/E multiple of 35.7 its annualised 1QCY05 earnings. In our view, Glaxo has restructured itself well so far. The company has focused itself on its power brands and is likely to dominate these categories going forward. Glaxo will soon be entering growing market segments like cardiovascular, CNS and diabetes. It is exploring in-licensing opportunities in the gynaecology, gastroenterology and nutritional segments. Going forward, the company is also likely to start clinical trials, which shows that the Indian subsidiary is high on the parent's radar. Also, now that the product patent regime has come into force in India, the company is set to launch new patented products from its parent's portfolio (after 2007).

    The company reported subdued 1QFY05 numbers due to VAT and MRP based excise related concerns. We expect CY05 also to be a subdued year. Also, though beneficial in the long term, the impact of the product patent regime is not likely to have an immediate impact on growth. Having said that, prospects for the company look good from a long-term perspective.



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