GlaxoSmithKline Pharmaceuticals: Recovery ahead

The stock of drug maker GlaxoSmithKline Pharmaceuticals (GSK Pharma) — an Indian subsidiary of UK-based global major GlaxoSmithKline plc — has fallen close to 30 per cent since last April. Drug price control in India and supply-side constraints took a toll on the company’s financial performance and on the stock. Weak sentiment on the bourses did not help too. But this presents a buying opportunity for investors with a long-term perspective.

At ₹2,707, the stock trades at about 64 times its trailing 12-month earnings, lower than its three-year average of nearly 70 times.

While much higher than what Indian pharma stocks trade at, MNC subsidiary stocks have historically enjoyed high valuation premiums that have sustained over the years. The company’s business prospects should improve with launches and capacity expansion aiding volume growth.

Unlike many other India-based pharma companies that get a chunk of their revenue from the export markets, GSK Pharma sells predominantly in India.

With a nearly 4 per cent share, the company is among the major players in the India pharma market — seven of the company’s brands, including Augmentin (anti-bacterial) and Calpol (for treating fever) are among the top 50 in the Indian market. Therapeutic drugs account for nearly four-fifth of GSK Pharma’s revenue, while vaccines contribute about 15 per cent.

The company was put on the back-foot in 2015-16 and in the current fiscal too due to the drug price ceiling directives by the National Pharmaceutical Pricing Authority (NPPA). Nearly a quarter of GSK Pharma’s drug portfolio was impacted by the inclusion in the NLEM (National List of Essential Medicines). Besides, constraints of supply from the parent facility caused shortages of many vaccines.

The ban on fixed dosage combination drugs also impacted the company, though to a lesser degree.

While the company published results for the 15-month period ended March 2015, results prepared on memorandum basis show a nearly 11 per cent year-on-year dip in profit (before exceptional items) and flat net profit (₹375 crore) for the 12-months ending March 2016. Net profit in the first half of FY 2017 also suffered (10 per cent dip), primarily due to a weak show in the first quarter.

But the company’s performance should get better.

One, volumes in the therapeutic drugs business have remained healthy and should continue to grow. Next, the impact of the drug price cuts on financials should wane in the coming periods.

The performance in the second quarter (ended September 2016) of FY 2017 has shown improvement with operating margin reviving to about 18 per cent and net profit rising about 4 per cent Y-o-Y. The management expects the margin to inch up to 20 per cent levels.

The recent revocation of the ban on fixed dosage combination drugs by the Delhi High Court is also a positive. Meanwhile, the company has been launching new products with considerable success. For instance, Synflorix (for pneumococcal conjugate disease) has become the biggest brand in the company’s vaccine portfolio in the second year of launch.

In the latter part of 2016, the company launched Priorix tetra, a combination vaccine against measles, mumps, rubella and varicella. The acquisition of the vaccine business of Novartis has also added to GSK Pharma’s strengths in the segment.

The company is adding to its production capacity. Besides investing about ₹500 crore to upgrade its manufacturing facility in Nashik, Maharashtra, the company is also setting up a new facility in Vemgal, Karnataka at an outlay of about ₹1,000 crore.

The new facility is expected to be completed in 2018. These should help address issues of supply constraints that hobbled performance in the past.

With cash of nearly ₹2,000 crore and negligible debt, the company is well positioned to fund its expansion plans.

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