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GSK Pharma: Gearing for 2005

Oct 7, 2003

GlaxoSmithKline Pharmaceuticals Ltd (GSK) is India’s largest pharmaceutical company with a market share of 7%. Globally, its parent, GlaxoSmithKline Plc is the second largest pharma company. Although GSK’s product portfolio boasts of some of the best-known brands in the domestic market, stiff competition and a slump in the domestic market has stunted the company’s revenue growth in recent months. In this context, let us briefly understand GSK’s business structure and its strategy in view of the implementation of product patents post 2005. Business structure…
GSK’s business can be classified into pharma (80% of FY03 revenues), agrivet farm care (AFC) (9%), qualigens fine chem (QFC) (6%) and exports (5%). In the pharma business, GSK’s products enjoy leadership position in the dermatologicals, corticosteriods and thyroid preparation segments. GSK registered an 8% growth in this segment in FY03. The company’s core products continued to record double-digit growth. This apart, augmentin and vaccines range of products also continued to gain market share. In the AFC segment (animal health products), GSK has presence in the cattle, poultry, aquaculture, canine, equine and sheep segment. A large customer coverage and distribution network has helped the company register a 3.6% growth (FY03) despite a slump in domestic market demand.

In the QFC business (laboratory chemicals), Glaxo enjoys market leadership with a share of 27%. In this segment, the company has presence in diagnostics, laboratory glassware and other laboratory requirements like filter paper, disinfectants, dispowares and distilleries. Although revenues from this segment declined by 4.6% in FY03, this segment made a turnaround of sorts by recording a 9.6% growth in 1HFY04. As far as exports business is concerned, GSK generates revenues by acting as an outsourcing base for its parent. However, with the reduction in requirement of Ranitidine base from the parent, exports have been impacted. Exports declined by 21.8% in FY03 and by a further 47% in 1HFY04.

Financials…

Financial overview...
  1HFY03 1HFY04 Growth (%) FY02 FY03 Growth (%)
Revenues (Rs m) 5,390 5,603 4% 10,103 10,473 4%
Operating profits (Rs m) 969 1246 29% 1046 1737 66%
OPM (%) 18.0 22.2   10.4 16.6  
Net Profits (Rs m) 636 999 57% 440 981 123%
NPM (%) 11.8 17.8   4.4 9.4  

Despite tough market conditions in view of the VAT fiasco and general slowdown in the industry, GSK has managed to record a modest growth in the topline. Moreover, benefits of the restructuring exercise undertaken by the company and focus on core brands have started to accrue. Resultantly, GSK was able to double its bottomline. Even during 1HFY04, although the topline grew by a modest 4%, net profits increased by a strong 57%. (For a more detailed analysis of 1HFY04 results click here)

Gearing for 2005…
Recognizing the growth potential in the domestic market post 2005, GSK has devised a strategy to take advantage of the same. GSK has targeted a topline growth rate at a little higher than the industry average and a bottomline growth that is faster than the topline growth. Most importantly, the company has decided to make gradual launches of new products. On an average, GSK plans to launch three products per annum. On the operations front, the company devised a strategy to improve its sales force efficiency by 50% during the 2001-05 period. This apart, GSK also plans to make a foray in the high margin chronic areas of CNS and diabetes. The above initiatives are expected to help the company in preparing for the post 2005 product patent regime and take advantage of its parent’s strong product portfolio.

At Rs 449, GSK is trading at a P/E of 17x its annualized 1HFY04 earnings. Limited exposure in high-margin lifestyle segments of CVS, diabetes and CNS segments and the company’s high exposure to DPCO remains a cause for concern. However, in view of the impending implementation of product patent, the strategy adopted by the company for preparing itself for the same, its market leadership position and access to parent’s strong product portfolio, we remain positive about the long-term prospects of the company.

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