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GSK Pharma: A Sterling Performance - Outside View

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GSK Pharma: A Sterling Performance
Jun 9, 2010

GlaxoSmithKline Pharmaceuticals--in its original avatar--may well rank as one of the oldest MNC pharma companies to set foot in India and today, still continue to be in the business of bringing succor to the sick and the ill. For the matter of record, its beginnings in India date back to 1924 when it began life as a corporate entity, with an initial paid up equity of Rs 18 m. A humungous sum of money for its time. Cut to the new century and much water has flowed under the bridge in the last decade or so. A few mergers and a few disinvestments seem to have propelled the company into a new orbit-especially on the bottomline front.

The merger, in the main, with SmithKline Beecham Pharma in 2001 and with Burroughs Welcome in 2004 along with a few divestitures-the chemical healthcare business in 2006 and the fine chemicals business in 2007-the latter 2 bringing in a hoard of lucre. Shareholders were amply rewarded following these 2 exits. The 2 mergers led to an increase in the capital base from Rs 600 m to Rs 870 m.

In hindsight, these deft moves also saw the arrival of lady luck in abundance. Following the 2001 acquisition, sales grew almost 18% that year with the pre-tax margin on sales growing to 10.5% from 9% previously. The 2004 merger saw sales accelerating 24% but the pretax margin surged to 28%. The 2 divestitures saw margins accelerating to 33% and 35% in 2006 and 2007---with the pretax margin peaking at 40% in 2009.

Some help did come from its bulging cash reserves, accumulated partly from the sales of 2 businesses which helped free the company from all working capital costs and brought in Rs 1 bn in other income (including a dividend from its wholly owned subsidiary). This other income amounted to almost 15% of pretax income in 2009. The cash kitty including encashable securities stood at over Rs 18 bn in end 2009. Its piggly wiggly wholly owned subsidiary Biddle Sawyer is another cash cow giving the company a return of almost 38% on its equity investment through dividends.

Cumulatively, sales rose 105% over the decade to Rs 19 bn but pretax profit margins rocketed 793% to Rs 7.6 bn. Not a liitle help came from the containment of the wage bills what with the management orchestrating some neat tricks on the HR front. Employee strength which peaked at 5338 nos in 2001 reached a nadir of 3620 nos in 2007 but rose to a liitle over 4000 in 2009. It is currently on a recruitment binge, adding to its sales staff to promote its product line.

The cash hoard also led the company in 2005 to execute a neat exercise of sorts to shore up the 'reserves' of the parent. It bought back 2.6 m shares and then very thoughtfully proceeded to extinguish the shares. In this process, the parent was quietly able to raise its stake in the Indian company to subsidiary status with an increased holding of 50.7%. Why in the first place should the parent spend its own money for such a delicate exercise please?

All this brings us to the more pertinent question. What exactly is its India game plan? They are more than a mouthful going by the directors'report. The report says that the company is in the forefront of making a significant impact on the healthcare needs of the country. With this in mind it has successfully introduced a number of products in such areas as diarrhea vaccine, refractory breast cancer, cervical cancer and an antithrombotic agent. It claims it is currently developing capabilities in the new focus area of cardiovascular capabilities.

It also waxes eloquent on the strides made by its 2 R&D centres in Nashik and Thane, on which it spent Rs 80 m in 2009 and it has also re-engineered its Nashik factory which has boosted productivity to boot. Its other focus area is in clinical operations. This business brought in about Rs 80 m to the bottomline in 2009. It has also filed for a number of new drug applications with the Ministry of Health and has received approval for several.

But the fact of the matter is also that there is very little investment in fixed asset addition and besides, the bulk of its manufacturing facilities (74%) are depreciated. One was under the impression that pharma manufacture was some sort of a high tech exercise-but apparently not so, at least not anymore. It manufacturing capacities are being flogged to the brim, especially in its largest item of sales-tablets and capsules - and almost 17% of its overall sales is bought out.

Its generation of cash from operations in 2009 was a cool Rs 5 bn but only a pitiful Rs 300 m went into fixed assets in 2009. There is no clue of what the directors plan to do with all this surplus cash. Or when its new lines of business will see the day of light or, whether they plan to expand capacities of their existing products or, go in for bought out sales, or what it will cost in capital expenditure terms to create the new product lines.

But given its performance to date and given the stated intentions of the management for the future, the company seems to be an excellent longer term bet. Reserves and surplus in excess of Rs 1.6 bn against a paid up capital base of Rs 840 m is another attraction.

Disclosure: Please note that I am not a shareholder of this company

This column "Cool Hand Luke" is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.

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