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Margin concerns for GSK pharma

Source : BUSINESS_STANDARD
Last Updated: Tue, Nov 08, 2011 03:40 hrs
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Intense competition leading to pricing pressure is hurting the company's revenue growth and profitability.

Competitive pressures and higher costs spoilt the September quarter show of GlaxoSmithKline Pharmaceuticals (GSK Pharma). The country's fourth-largest drug company by domestic sales recorded revenue growth of just four per cent year-on-year.

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Lower sales growth and higher costs also dented operating profit margins, which fell below the 30 per cent mark, ultimately resulting in an eight per cent y-o-y fall in net profit for the quarter. Given the competitive intensity in the acute segment (shorter duration illness) and aggressive pricing in some of the new products, holding on historic margins (35 per cent plus in the last two years) could be a tough ask.

The stock has been a laggard in the recent past, losing 12 per cent over the last three months, while the BSE Healthcare index has gained three per cent. At Rs 2,109, it trades at 26 times its CY12 earnings' estimates. Most analysts are bearish on the stock, given the tough business environment and the fact that a significant part of its drugs will fall under pricing control if the proposed policy is approved.

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COMPETITIVE PRESSURES
GSK Pharma's sales grew four per cent to Rs 614 crore for the quarter ended September. The reason was pricing pressure in anti-infectives, which account for a quarter of its sales. Managing director Hasit Joshipura says the mass market businesses and anti-infectives were impacted by lower industry growth, as well as a high base effect. Categories which have seen strong double-digit growth in the quarter are vaccines and dermatology.

Going ahead, higher dependence on acute therapy products is likely to keep the top line growth subdued, says Emkay analyst Deepak Malik.

LOWER GROWTH
Industry data for the 12 months ended September shows while the company's sales revenues grew 12 per cent, the industry grew by 14 per cent. A large part of GSK Pharma's sales growth came from higher volumes (11.5 per cent), with growth from prices and new products contributing less than one per cent. Prices have fallen by 0.2 per cent in the last year.

Compared to this, in addition to volume growth of 7.6 per cent, the pharmaceutical sector saw a greater contribution from higher prices (2.5 per cent) and new launches (4.3 per cent). Malik says the underperformance was due to lack of new product launches and subdued price growth.

MARGIN HIT
Lower revenue growth and higher costs translated into a 680-basis-point year-on-year fall in operating profit margins to 29.8 per cent. A 100 basis points is one percentage point. Higher raw material costs (up 12 per cent) and other expenditure (up 25 per cent) led to a fall in operating profits, as well as margins. In addition, the company says the ramp up in field force during the course of the year has impacted costs. Pricing pressures and higher share of its products under the new pricing control mechanism could keep the margins under check, feel analysts.

PHARMA POLICY IMPACT
The draft pharmaceutical pricing policy proposes to bring about 60 per cent of the drugs available in the domestic market under pricing control, as compared to the current 20 per cent. Unlike other top Indian pharmaceutical companies which get 18-45 per cent of their revenues from the domestic market, GSK Pharma's domestic sales constitute 93 per cent of revenues.

Given that 67 per cent of the company's high margin portfolio is likely to face a price reduction of about 10 per cent, Pinc Research's analyst, Sushant Dalmia, believes GSK Pharma will be the most negatively impacted by the development. In the event of this proposal getting approved, unless the company is able to cut costs proportionately or increase the share of drugs that are outside the purview of pricing control, expect its margins to come under pressure. Meanwhile, the company is expanding its field force and is planning new product launches, which will improve its revenue growth to 11-15 per cent in the years ahead. However, analysts are sceptical about the company's near-term profitability due to rising competition and higher costs. While operating profit margins in CY12 at an estimated 32.9 per cent will see an improvement over CY11, at those levels it will be still be 200 bps shy of CY10 margins of 35 per cent.


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