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Glaxo: Integration underway - Views on News from Equitymaster
 
 
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  • Sep 14, 2001

    Glaxo: Integration underway

    The operational integration of Glaxo with SmithKline Pharma seems to be through before its proposed merger by FY03. The management structure of the company has also undergone a change in the recent past.

    In a bid to revive its sales growth, the company has initiated a major rejuvenation of its product portfolio to focus on high margin products and align itself with that of SmithKline Pharma. The integration of its portfolio with SmithKline is expected to create a complimentary basket of products. The operational savings emerging from the merger is also widely known by now. Whether the new company, GSK India actually benefits from these exercises remains a question which only time would answer. Meanwhile the markets seem to be adopting a wait and watch approach.

    Glaxo regrouped all its brands under four main categories based on their profitability and future potential. These categories are Big Bets, Strategic, Bread & Butter and Tail end. Big Bets and Strategic products account for just 27% of sales but contribute around 42% of the total gross profits, reflecting premium margins commanded by these products. While the company intends to commit adequate resources for the first two categories, the bread and butter brands would receive support based on their potential to become strategic brands.

    Glaxo- betting on strategic brands
    Brand Category % to total sales Gross Margins (%)
    Big Bets 15% 50-55%
    Strategic products 12% 40-45%
    Others 73% 15-25%

    The company’s performance in terms of sales growth as well on the operating margin front has been quite volatile in last three years as shown in the chart below. Though sales growth is expected to remain flat in the near term, operating margins are expected to improve in FY03.

    A merger with SmithKline’s portfolio would also help…
    Except an overlap in vitamins segment, Glaxo’s product portfolio is complimentary with that of SmithKline Pharma. While Glaxo has strong presence in Vitamins and Dermatology segments, SmithKline Pharma is increasing its focus on vaccines segment. The merged entity would have a wider product portfolio across various therapeutic segments. A wider basket of products enables cross selling of products to the same set of doctors and physicians.

    Particulars Glaxo SmithKline Pharma GSK
    Market Share 5.7 1.3 7
    No. of Products 200 48 248

    The merger is also expected to create considerable operational cost savings. The cumulative cost savings are estimated in the range of Rs 470 m by FY03. The primary areas for cost savings would be bulk sourcing of raw materials, reduction in staff costs and shift from high cost manufacturing centers. The merger effect coupled with Glaxo’s focus on strategic brands is expected to result in operating margins improvement. The company has also launched several new products in last one year.

    At the current market price of Rs 291, the stock is trading at 29 times its expected earnings for FY02. In the past, the stock used to command premium to its peers. However, the valuation premium has been shrinking in last one year due to slowdown in company’s performance.

    The markets would be closely watching the results of current restructuring exercise and benefits emerging from operational synergies with SmithKline Pharma. In the long run however, the company’s growth would depend on the new parent’s commitment towards GSK India in terms of new product introductions. Though usual concerns over 100% subsidiary are subdued in case of Glaxo at this point of time, the parent company does have a subsidiary operating in India viz, SmithKline Beecham Asia Pvt. Ltd.

     

     

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