GSK: In good health

The management expects revenues to grow at 10 per cent in 2009.

Mehernosh Kapadia, executive director, GlaxoSmithKline Pharma expects the Indian pharma industry to grow at around 12 per cent over the next two years. His company, however, might grow at a slightly slower pace of around 10 per cent in 2009, though it would be better than the 8 per cent that the company clocked in the December 2008 quarter.

More than 90 per cent of Glaxo’s revenues are earned from the domestic market where demand is expected to remain steady. In the year to December 2008, Glaxo’s revenues from continued business – it sold the fine chemicals business in September 2007 -- grew by 10 per cent y-o-y to Rs 1,681 crore. This is slightly slower than Cipla’s domestic division y-o-y growth of 14 per cent in the nine months ended December 2008.

Generally regarded as a defensive sector, rating agency Fitch estimates steady domestic demand going forward. That should be good news for Glaxo, which sells formulations in almost all product categories, mainly anti-infectives, pain management and vitamins. The firm also entered into oncology with its first product Tykerb in 2008. However, a significant part of Glaxo’s portfolio -- 28 per cent of total revenues – comes from price controlled drugs such as Zintac (used for acidity problems) which limit profitability.

The firm earns close to 70 per cent of its revenues from priority products and vaccine sales and it has received approvals to launch Cervarix (treatment for cervical cancer), which will be its second oncology product. It has also tied up an in-licensing deal with Astellas for Micafungin (anti-fungal).

In 2008, despite drug launches such as Tykerb and Rotarix (prevention of rotavirus gastroenteritis), which result in high costs in the initial phase, Glaxo was able to control costs and remains highly profitable. Its operating profit margin expanded by 100 basis points to 35.6 per cent in 2008. The management is keen on maintaining its operating profit margin at 35 per cent in 2009, which should not be difficult as commodity prices are falling.

However, in the December 2008 quarter, the operating profit margin was 30 per cent at Rs 112 crore because of higher consumption of raw materials and packaging costs. With packaging material costs coming off, however, the firm should benefit. For the continued business (excluding fine chemicals) profit before tax and exceptional items grew 14.6 per cent y-o-y in 2008.