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GSK Pharma: ‘Extraordinary’ effect
Oct 30, 2007

Performance summary
  • Revenues grow 5% YoY in 3QCY07 led by the double-digit growth of priority products.
  • EBDITA margins improve marginally by 0.4% led by an increased emphasis on improving the product mix.

  • The company sells off its fine chemicals business for a consideration of Rs 2.4 bn.

  • Excluding the impact of the extraordinary income during both 3QCY06 and 3QCY07, net profits grow by 10% YoY.

Financial performance: A snapshot
(Rs m) 3QCY06 3QCY07 Change 9mCY06 9mCY07 Change
Net sales 3,992 4,208 5.4% 12,327 12,379 0.4%
Expenditure 2,709 2,842 4.9% 8,382 8,339 -0.5%
Operating profit (EBDITA) 1,283 1,366 6.5% 3,945 4,040 2.4%
EBDITA margin (%) 32.1% 32.5%   32.0% 32.6%  
Other income 254 339 33.5% 659 923 40.1%
Depreciation 41 38 -7.6% 118 112 -5.2%
Profit before tax 1,496 1,667 11.5% 4,486 4,851 8.2%
Tax 505 576 14.1% 1,551 1,683 8.5%
Extraordinary item 1,864 1,399 -24.9% 1,842 1,399 -24.0%
Profit after tax/(loss) 2,854 2,490 -12.8% 4,776 4,567 -4.4%
Net profit margin (%) 71.5% 59.2%   38.7% 36.9%  
No. of shares (m) 84.7 84.7   84.7 84.7  
Diluted earnings per share (Rs)*         45.4  
Price to earnings ratio (x)         24.2  
(* on a trailing 12-month basis)

What is the company’s business?
GSK Pharma is the largest pharma company in the Indian market with a share of 6.4% (Source: ORG-IMS Dec 2006). It is a 49% subsidiary of the US$ 46.5 bn Glaxo Group, the world's second-largest pharma company with an R&D war chest of US$ 5.7 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 and fine chemicals. In May 2006, the company sold off its animal healthcare business to a European company ‘Virbac’.

What has driven performance in 3QCY07?
Topline scenario: GSK Pharma’s topline during the quarter grew by 5% YoY, which was largely led by the pharmaceutical business. The company divested its two other businesses – animal health and fine chemicals in 3QCY06 and 2QCY07 respectively and this move is in line with its strategy to focus on the core business of pharmaceuticals. Active promotion of priority products (accounting for one third of revenues), which registered a double-digit growth, and shift from the acute to the chronic disease segment has contributed to the growth in the pharmaceutical business. As far as new products are concerned, the company launched ‘Arixtra’ (Fondaparinux), a new generation anti-coagulant and the cardiovascular drug ‘Carzec’ (Carvedilol) during the nine-month period.

Margins improve: Operating margins expanded marginally by 40 basis points (0.4%) in 3QCY07 owing to an improvement in the product mix (the company has been concentrating on increasing its focus on priority products as these are not under price control) and decline in raw material costs and other expenses (as percentage of sales). Going forward, while we do not forsee a significant rise in operating margins from further cost reduction, the company is aiming to maintain margins by improving its product mix.

Cost break-up
(% of sales) 3QCY06 3QCY07 9mCY06 9mCY07
Raw material consumption 40.4% 40.3% 41.3% 40.1%
Staff cost 9.6% 9.5% 9.6% 9.9%
Other expenses 17.9% 17.7% 17.0% 17.2%

‘Extraordinary’ impact: During the quarter, GSK Pharma received extraordinary income to the tune of Rs 2.4 bn on sale of the fine chemicals business to Thermo Electron LLS India Pvt Ltd. Similarly, in 3QCY06, the company had received income of Rs 2 bn on sale of its animal health business. Excluding the impact of these extraordinary items, the bottomline has grown by 10% and has outpaced topline growth duly helped by the 34% YoY rise in other income.

Over the last few quarters: While GSK Pharma’s topline has been declining in the last five quarters owing to the divestment of the animal health business and product supply shortages from third party manufacturers, growth in this quarter has been led by its priority products and this can be construed as a positive sign. What is commendable is that the company has managed to maintain operating margins at around 30% levels, which is the highest amongst the MNC pharma companies under our coverage.

Quarterly trend
(%) 2QCY06 3QCY06 4QCY06 1QCY07 2QCY07 3QCY07
Net sales growth -12.4% -5.1% -1.0% -1.1% -2.9% 5.4%
Operating profit margin 30.7% 32.1% 25.4% 34.4% 30.9% 32.5%
Net profit growth -12.0% -7.7% 60.0% 10.0% 5.9% -12.8%

What to expect?
At the current price of Rs 1,099, the stock is trading at a multiple of 19.8 times our estimated CY09 earnings. Going forward, GSK Pharma intends to continue its focus on its priority products, which account for a third of its revenues and increase the contribution from the chronic therapy segment. The company has unveiled plans of introducing 3 new products in CY07, out of which 2 have been launched, and plans to introduce 2 vaccines namely ‘Cervarix’ and ‘Rotarix’ in the domestic market by CY08. GSK Pharma is also planning to increase activities on the clinical trials front, which shows that the Indian subsidiary is high on the parent’s radar. We have yet to factor in the sale of the fine chemical business in our estimates and shall update our research report accordingly.

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