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GSK Pharma: Research meet extracts - Views on News from Equitymaster
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GSK Pharma: Research meet extracts
Sep 23, 2005

We met Glaxo this week to get a perspective of the Indian pharmaceutical market and how the company intends to benefit from the same. Here are some key extracts. What is the company’s business?
Glaxo is the largest pharma company in the Indian market with a share of 6.5% (December 2004). It is a 49% subsidiary of US$ 33 bn Glaxo Group, the world's second largest pharma company with a 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, animal healthcare and fine chemicals. In 2004, it successfully merged Burroughs Wellcome India with itself.

Indian pharma market perspective: The Indian pharma market has grown at the rate of 3% to 5% over the last 4 years i.e. post 2001. Prior to 2001 the Indian market showed a more rapid pace of growth of about 7% to 8%. Against this backdrop Glaxo has posted a 4% growth over the last 4 years in line with the industry trend.

Also, the Indian pharma market traditionally was focused on the anti-infectives segment, which has witnessed dwindling margins over the years. However, due to a change in lifestyles, the focus is now shifting to the chronic segment. Therefore, drugs catering to these diseases command higher margins. Just to put things in perspective, the margins of cardiovascular drugs are around 25% to 26%, for anti-diabetic drugs, it is around 18% to 19% and for psychiatric drugs, the margins are between 10% to 12%. Realizing this, Glaxo too is planning to establish a significant presence in the chronic segment. However, it will take atleast 5 to 7 years for the lifestyle portfolio to significantly grow.

New products and in licensing: Glaxo intends to launch new products into the country either from its parent’s product portfolio or through in-licensing agreements. As far as the lifestyle segment is concerned, the parent company has been developing strengths in the anti-diabetic and psychiatry field. The rationale behind entering into in licensing deals with companies is to generate revenues from those products, which have not been developed by Glaxo’s parent company as well. While going in for an in-licensing agreements, Glaxo launches a product in the country only if it has the potential to generate revenues to the tune of Rs 100 m per year in the first 3 years or Rs 250 m per year in the first 5 years. Glaxo has been launching around 4 to 5 new products every year.

The company currently has tie-ups with UCB for the drug ‘Vozet’ in the anti-histamine segment and with Japanese company Eisai for the product ‘Paritec’, an anti-ulcer drug amongst others. In light of the product patent law in effect in India, Glaxo has also stated that they will not adopt a ‘wait and watch’ policy to see how this law will pan out as far as launching patented products are concerned. The company is looking to launch the first patented product in 2007 or early 2008.

Vaccines: Glaxo has a strong presence in the vaccines market and the company expects this business to be one of the key growth drivers going forward. The company has already launched 5 vaccines in the Indian market. 3 more vaccines are on the anvil, which include ‘Ceravarix’ (for cervical cancer), ‘Rotavirus’ (for childhood diarrhea) and one anti-cancer vaccine.

Clinical trials: India is fast becoming a hub for conducting clinical trials owing to various factors, which include good infrastructure for laboratory testing, skilled medical professionals, language skills etc. Taking advantage of this opportunity, Glaxo has been conducting clinical R&D (number crunching, compilation and collation) in the country too. The company is looking at these services as a ‘window of opportunity’ to increase its relevance to the global parent and to other companies as well.

Marketing and distribution: Glaxo’s strong marketing and distribution network has been a result of its focus on ‘medical communication’. The company has been a pioneer in disseminating information to medical practitioners providing it a strong visibility amongst the medical community.

Parent intervention: The decisions pertaining to the Indian operations are taken by the GSK Pharma India itself and as such are not influenced by the parent.

Sustainability of margins: Glaxo has witnessed a sharp rise in margins to around 28% to 30% levels. The margin expansion has come about owing to a rationalization on the manufacturing front. The company closed down unviable manufacturing plants, sold those properties and also undertook cost reduction measures. It also wielded a tight control over expenses. However, these rationalization benefits have already been factored in and the company does not expect further benefits on this front going forward. Also, the scope to control expenses in the years ahead will reduce.

As a result, the company is now focusing on improving its product mix. This includes focusing on products, which are outside the purview of the DPCO (products under DPCO now contribute 33% to revenues as against 45% about 4 years back) as well as increasing volumes (through in licensing and launch of parent company’s products).

Capex: Glaxo does not have any significant capex plans in the next 3 years.

Employee perspective: We asked the management to give an indication of the attrition rate faced by the company. The attrition rate is higher among the field force at about 20%. With regards the other staff, attrition rate is around 8% to 10%. More importantly, as far as the senior management is concerned, the rate is pretty negligible.

What to expect?
At the current price of Rs 856, the stock is trading at a price to earnings multiple of 24.1 times its annualised 1HCY05 earnings, which is at the higher end of the valuation spectrum. Glaxo has been focusing on its power brands, which will continue to be one of the key growth drivers going forward. Glaxo’s foray into growing market segments like cardiovascular, CNS and diabetes coupled with exploration of in-licensing opportunities will also augur well. The company is also into conducting clinical trials, which shows that the Indian subsidiary is high on the parent’s radar. Thus prospects for the company look good from a long-term perspective.

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