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SmithKline: Fast recovery expected

Jun 20, 2001

SmithKline Beecham Pharma (SKBP) had a tough time last year. Additional Import duties imposed on one of its key product, Energix-B coupled with price cuts in other key products such as Zevit impacted the performance of the company negatively. Further, increasing competition from domestic manufacturers resulted in falling realisations in vaccines, where the company has a stronghold. However, we expect the company to bounce back with new products launches and variants expected to help in quick revival of its fortunes. Read on. It all started with government’s decision to impose 38.5% import duty on Hepatitis B vaccine. Thus, Energix B (the company’s product for Hepatitis B), which was imported by SKBP from its parent company suffered from this duty hike. To make things worse, inclusion of the vaccine in Mass Immunization programme initiated entry of other established players like Wockhardt, Pfizer, and Shantha Biotech in the segment. The competition amongst the players led to aggressive price cuts and growth for the product became volume driven. Energix B thus suffered heavily as it was priced at the premium end.

To counter this situation, SKBP launched a range of stand alone and multi-clonal vaccines as shown in the table below. The combinational vaccine is expected to canabalise usage of various standalone vaccines and is expected to receive good response in the market place. We expect new vaccine launches, combinational vaccines in particular to compensate for drop in sales of Energix B.

SKBP- Vaccine Product Portfolio
Product Remarks
Harvix Hepatitis A Vaccine launched last year
Viralrix Chickenpox Vaccine launched last year
Energix B Existing product for Hepatitis B vaccine
Typherix Vaccine for typhoid launched last year
Twinrix Combinational vaccine for Hepatitis A and B
Tritanrix Combinational vaccine for Hepatitis B and DTP
Infranrix Launch expected soon

Apart from vaccines, SKBP’s portfolio includes Iodex (and line extensions of Iodex brand for pain management), Augmentin (fast growing brand in anti-infective segment), Zevit and Fefol (leading nutritional products). Except for the nutritional products, all other brands are out of DPCO coverage. We expect these brands to register growth in the range of 10-15% in the current year. However, the vaccine portfolio remains the trump card for SKBP’s success. Based on success of its new vaccine introduction, we expect the company to register a growth of 10.5% in FY02 (as shown in the chart above).

The Indian vaccine market is lucrative and volumes are expected to grow at 35% p.a. Considering that, one can expect further product launches in vaccine segment to continue based on the fact that its parent company is the largest player in vaccine segment worldwide. However, the concern for the company is fact that these vaccines are currently, imported by SKBP from the parent company to market it in the local market. In a scenario where the market is highly susceptible to price wars, heavy import duty remains a cause of concern.

SKBP remains at the mercy of its parent company…
Another cause of concern for investors at this point of time is the complex nature of parent company’s holdings. In line with the global merger, Glaxo India and SKBP have announced their merger plans in the ratio of 2:1 (1 share of Glaxo for every two shares of SKBP). The merger is expected to create synergies in terms of operations and better distribution reach resulting in considerable cost-savings for the merged entity. After, the merger, the parent company would still have another subsidiary Burroughs Wellcome in India.

Apart from that, erstwhile SmithKline Beecham (SB) also had a 100% subsidiary viz. SmithKline Beecham Asia. ‘Hibrix’, a meningitis vaccine was launched by the parent company through this subsidiary. There is an uncertainty as to the launch of ‘Avandia’ an important advancement in treatment of Type 2 diabetes. In such a scenario future prospects of SKBP, which is at the mercy of parent’s product portfolio, remains uncertain.

SKBP earns service income from maintaining, providing and analyzing clinical data from erstwhile SB. Though the prospects of the same, increasing in future are bright, there is uncertainty on the same.

At the current market price of Rs 170, the stock is trading at 14.5 times it FY02E earnings. The valuations of the company are quite low when compared to other MNC peers. It could be due to the fact that the markets are adopting a wait and watch approach. Apart from that, the stock price of the company is moving exactly in tandem with the swap ratio with Glaxo (330 / 2) and is mirroring the recent southward journey in Glaxo’s stock.

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