The increased thrust on more profitable products should help the country's largest pharmaceutical company post better numbers in the comng years
The going has been tough for Glaxo, India's largest pharmaceutical company. An ageing product portfolio and fierce price competition has had an adverse impact on Glaxo's performance.
The company's sales declined by eight per cent to Rs 346 crore in the first five months of the current fiscal as compared to the corresponding period last year.
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To counter the slowdown in sales, Glaxo is now focusing on improving its profitability by allocating more resources to its more profitable brands, cutting administration costs and improving marketing thrust.
Making of a mammoth
The merger of SmithKline Beecham Pharmaceuticals with Glaxo India is expected to be complete by the end of this year. Post-merger, the parent company Glaxo SmithKline Plc will have a 48.83 per cent stake in Glaxo SmithKline India.
The combined entity is expected to have a turnover of Rs 1,400 crore in fiscal 2001. In the first year of combined operations, the company is expected to save around Rs six crore through synergies. The cost saving is expected to increase to Rs 50 crore by 2003.
The combined entity of Glaxo India, Burroughs Wellcome and SmithKline Pharma will have the highest market share of around seven per cent in the Indian pharmaceutical industry.
Glaxo India has been strong in the areas of antibiotics, dermatology and respiratory drugs. And SmithKline Pharma has been a market leader in vaccines and balms.
The key brands of both the companies complement each other, making for a formidable product portfolio. The focus in future will be on vaccines, anti-infectives, dermatology, vitamins and therapy for respiratory ailments.
Says V Thyagarajan, managing director GlaxoSmithKline India, "The merger will throw up more opportunities because we have a whole range of vaccines which we will be focusing on. We have a good mix of established and new products in our range to really propel growth."
Nothing new
The company has been reluctant to introduce new products in the country in the absence of a product patent regime. Says Thyagarajan, "Patent's is a big issue. Since Indian companies don't have to abide by the international patent regime by law, it is not a level playing field today."
Products launched last year include Glaxo's blockbuster drug- Seretide, an anti-asthma inhaler and Hepitec, an oral anti-viral treatment for Hepatitis B. The company launched Zyban, a non-nicotine-based oral product for smoking cessation in the current fiscal.
Glaxo sees tremendous potential from Zyban considering the fact that India has about 37 million cigarette smokers. In the first year, Glaxo expects to convert 50,000 smokers which would translate to Rs 2.5 crore in sales.
Under control
Another limitation for Glaxo is that a large proportion of its products are covered under the Drug Price Control Order (DPCO). With 60 per cent of its product portfolio under DPCO, the company has little flexibility in pricing.
Major brands of the company under price control include Zinetac, Betnesol, Septran and Bentovate. Under the proposed drug policy, Zinetac (sales of Rs 59 crore) and Septran (Rs 27 crore) are expected to go out of DPCO coverage, while Ceftum (Rs 40 crore) will enter the span of control.
Any substantial price increase in Septran and Zinetac seems unlikely due to competition from generic products. But since these are well known brand names Glaxo may be able to increase prices marginally without losing marketshare. Profitability could improve marginally.
Labour woes
Glaxo's merger with Burroughs Wellcome has been delayed due to labour problems. The employees union of Burroughs Wellcome have approached the labour commission opposing the proposed downward revision of wages.
Burroughs Wellcome's employees have been paid higher wages than their counterparts in Glaxo and hence the deadlock. Burroughs Wellcome registered a 23 per cent decline in sales at Rs 56 crore in the first five months of the current fiscal.
A significant price reduction in Septran, the company's premier product has affected sales adversely.
Future plans
Glaxo India not only wants to preserve its leadership in terms of sales but also in terms of profitability. It plans to focus its marketing efforts on 30 key brands that account for around 75 per cent of the revenues.
Says Thyagarajan, "Our emphasis from hereon will be to grow the profits faster than the sales. We'll be focusing on profitable and newer products."
The company has already identified brands that will henceforth see greater allocation of resources. It plans to get rid of some of its tail-end products. In fiscal 2000, Glaxo realised around Rs 24 crore from the sale of five brands.
To improve profitability, it plans to curtail costs in non-productive areas like administration while increase spending on more productive areas like sales and marketing. It has also identified some 65 stock keeping units that can be divested or contracted out.
Financials and valuations
In the first quarter of the current fiscal, sales was down four per cent to Rs 176.64 crore. Net profits declined 28 per cent to Rs 10.17 crore mainly due to a 62 per cent fall in other income and stiff competition from generics.
Other income fell from Rs 16.65 crore to Rs 6.37 crore since there was no income from sale of brands unlike last year. The operating margins declined from 14.94 per cent to 12.80 per cent. Going forward, the re-jigging of product portfolio should enhance margins.
Due to its strong parentage, the combined entity of GlaxoSmithKline will have access to the technological expertise and the parent's rich product pipeline which can be leveraged to propel growth. Short term triggers could be the dilution in DPCO but it will take a while for the restructuring efforts to pay off.
The stock trades at Rs 328 discounting its annualised earnings 48 times and looks fully valued. Investors can defer fresh investments at this point of time.