SmithKline Beecham Pharma would be the only pharma scrip to have fallen in last year's pharmaceutical stocks rally. The scrip had fallen 50 per cent to Rs 288 in April 1999 from a high of Rs 650 in March 1999 and is now trading around Rs 380. The steep decline in the share price was due to the increase in import duty on vaccines from zero to 38.5 per cent in this year's budget. Also, the company had to reduce the price of its vitamin-B tablet Zevit according to the Drug Price Control Order. What is even more worrying is the fact that the hike in import duty on vaccines comes at a time when Indian players are already taking away SmithKline Pharma's market share.
Analysts are also unanimous about the fact that the company is going to post far from impressive results in the quarter ending June 1999. Also, there is a concern about the 100 per cent subsidiary SmithKline Beecham Asia Pacific Pvt Ltd which owns brands like Crocin, Eno and Aquafresh toothbrushes and toothpaste. Where do all these things leave SmithKline Pharma shareholders? A report.
SmithKline Pharma's market share in the Indian pharmaceuticals market is around 1.8 per cent. However, it is one of the fastest growing companies among the multinationals. It has grown at 24 per cent compounded annual growth rate for the last three years and is expected to grow at the same rate for the next 2-3 years due to new product introduction from its parent's portfolio and strong existing brands.
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The company had reported a 22.15 per cent rise in sales for the first quarter March 1999 to Rs 89.91 crore but its net profit fell 28 per cent to Rs 7.9 crore. The fall in profit was mainly due to devaluation of currency, lower price realisation due to increasing competition and additional promotional expenses. The margins are expected to reduce further due to the increase in import duty of its Hepatitis-B vaccine Engerix.
Iodex, the pain relief ointment, is its leading brand with sales of Rs 75 crore in 1998. The company has drawn up plans to achieve a turnover of Rs 200 crore over the next five years for Iodex. It is planning to achieve this through line extensions, aggressive marketing and distribution.
There is a huge rural market for Iodex which the company is yet to penetrate. It plans to launch Iodex in sachets and caplets which would be priced between Rs 2 to Rs 5. This will help the company to increase its sales in rural areas. Its current sales break-up is in the urban and rural market is 70:30. It plans to increase the rural share to 50 per cent in future.
It also plans to introduce a special type of Iodex balm which would be targeted at sportspersons. The balm would be sold in bottles, spray cans and tubes. Iodex is currently the market leader in the segment with a 26 per cent market share. The company wants to increase its market share to 35 per cent. Its close competitors are Zandu, Amrutanjan and Moov.
Vaccine margins under pressure Engerix-B launched more than a decade ago was the first genetically engineered hepatitis-B vaccine in India. Ever since its launch Engerix-B has been a market leader in the segment and currently has a market share of around 80 per cent.
The company imports the entire vaccine from the parent's plant in Belgium making it vulnerable to the higher duty as well as exchange rate fluctuations. The increase in import duty has made it almost impossible for the company to reduce the price of the vaccines.
Its market share is now under threat from local players like Shanta Biotech and Bharat Biotech who manufacture the same vaccine locally and at a lesser cost. Other domestic majors like Wockhardt and Cadila are also planning to enter this market.
SmithKline Pharma does not have any plans to manufacture vaccines in India. Currently, Engerix-B is priced at a 60 per cent premium to the local vaccines. Though the company has started giving discounts on bulk purchases, it will be difficult for the company to maintain the market share. The Hepatitis-B vaccine does not figure in the list of compulsory vaccines, but is in the list of recommended vaccines, both of the government and the Indian Paediatrician Association (IPA). The market of Hepatitis-B vaccine is growing at 30 per cent and the potential for Hepatitis-B vaccines in India is huge. Hence the company will have to concentrate on higher volumes to offset lower margins.
The DPCO blow
The company also has a major presence in vitamins with a strong brand Zevit. Zevit (with zinc), a vitamin-B tablet, has recently been affected as the Drug Price and Control Order (DPCO) has ordered a 50 per cent cut in the market price of the product. Zevit (with zinc) is the market leader with 50 per cent market whereas Zevit without zinc has a 12.5 per cent share and ranks third in the industry. The company's vitamin business is expected to grow at a slow rate in future due to increasing competition. In the anti-anaemic segment, it has brands like Fesovit and Fefol, and the company is a market leader in this segment with nearly 20 per cent market share.
A strong parent
SmithKline Pharma is a 40 per cent subsidiary of SmithKline Beecham plc (SB) of UK. The parent is a $13.7 billion company and is the global leader in vaccines with about 30 per cent market share. It is also one of the top three over the counter (OTC) medicines company in the world. Its research and development expenditure accounts for 11 per cent of sales and is mainly focused on anti-infective, cardiovascular, vaccines and central nervous system (CNS) segments.
The parent has a rich product pipeline and it has also shown good interest in the Indian subsidiary. Analysts expect the company to launch a number of products in India. There have also been moves by the parent to increase its stake to 51 per cent.
Recent launches
The company has been active in its new product launches. Among the other recently launched brands are Varilix - a chicken pox vaccine and Harvix - a Hepatitis A vaccine. Both these vaccines are first of their kind in India and are doing well.
Augmentin, an anti-infective launched a few years ago, is doing extremely well now. Anti-infectives contribute around 27 per cent to the company's sales. It features among the top 250 pharma brands in the country. It is also the single largest contributor to the parent company's sales as it is reputed to be better than other antibiotics. Augmentin has improved tolerability among patients. The progress of Augmentin in India has also been very good and the brand is growing at a faster rate than the overall industry.
The company exports medicines to Africa, Far East and Europe to meet the group's sourcing needs. Exports for 1998 amounted to Rs 94.42 crore and are expected to improve this year due to favourable international conditions. The ERP project which addresses the supply chain process is almost complete and will improve its working capital management.
Future
The company is planning to launch Avandia which is an important advancement in treatment of type 2 diabetes. Avandia is an oral medication available in tablets which helps insulin to act better and ensure more sensitivity to tissues. No drug is currently available in the country in the same formulation. Avandia helps the body's own insulin to work better result