GlaxoSmithKline Pakistan (GSK)

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With over a decade of operations and leadership, GSK is the largest pharmaceutical company in the country. GlobalSmithKline is a market leader in value. The company operates two industry segments within the pharmaceutical sector: Pharmaceuticals which include prescription drugs and vaccines and the Consumer Healthcare which includes over-the-counter (OTC) medicines, oral care and nutrition.

GSK's product portfolio includes registered pharmaceutical medicines, vaccines, over-the-counter products, as well as other consumer healthcare brands. Augmentin, Seretide, Amoxil, Velosef, Zantac, Panadol and Calpol are some well-known medicine brands of the company. GSK Pakistan also boasts of some very popular consumer healthcare brands such as Horlicks, Aquafresh, Macleans and ENO.

Revenues CY12 During CY12, GSK Pakistan showed a slight improvement in its sales, increasing by a little over six percent relative to the same period last year. This pace of growth was slower relative to GSK's increase in sales during previous years and only half of that in CY11 relative to CY10.

The main contribution to the top line of the firm came from the key antibiotic brands and sub segments like antibiotics, dermatologicals and consumer healthcare. Sales receipts from these categories contributed 65 percent to the overall top line of the firm in CY12.

However, a number of factors were responsible for the slower pace of growth and eroded the positive impacts of product expansions. Firstly, the import quota of the Pseudo-ephedrine raw material was suspended by the Narcotics Board. Secondly, government spending on large tenders was reduced, and thirdly, Chlorofluorocarbons (CFCs) containing products were discontinued as per global guidelines.

Though exports make up only three to four percent of the total sales of GSK, they registered a healthy growth of over 10 percent year-on-year during CY12, representing revenues primarily from Afghanistan and Sri Lanka. The pharmaceutical segment revenue grew by 5.7 percent year-on-year during CY12. On the other hand, the consumer healthcare category was greatly helped by enhanced brand investment, especially for well-known brands such as Iodex, Panadol, Sensodyne, Horlicks and ENO. Sales of the segment witnessed robust growth 12 percent year-on-year during CY12

Profitability CY12 Around 80 percent of the company's expenses are the cost of sales, and any fluctuation in the input prices and supply constraints would explain much of the route taken by the profits of the company.

Gross margins during the 2012 were slightly lower than those of 2011 due to rising cost of raw and packing material, higher inflation, depreciating local currency, and escalating fuel prices. Moreover, the gross margins have also been eroding due to stagnant prices of various products. Though the reasons like inflation, depreciation of currency and rising cost of material, packing and energy remain intact, the company was able to curtail cost of sales through rationalisation and cost cutting methods.

Though there were some price adjustments on certain products by the government during CY12, they were insufficient to offset the impact of high cost indicators mentioned above. Selling, marketing and distribution expenses also witnessed an uptick during CY12 relative to CY11. However, due to the firm's cost rationalisation to keep expenses in check, the growth in sales and marketing expenditure remained significantly below the previous year's growth levels.

On the administrative side, expenses remained significantly below CY11 levels; this was because of the one off costs incurred during CY11 for capacity upgrade. On the whole, GSK's earnings spurred by 15 percent year on year in CY12.

Debt and leverage position The pharmaceutical sector is a low leverage sector. The company too operates with no debt on its books. The pharmaceutical firm's cash requirement is largely met through internal cash generation without reliance on short-term borrowings.

During CY12, GSK carried out capital expenditures worth Rs 1.498 billion, highest in the last five years, for plant modernisation, plant improvement, capacity enhancement and purchase of vehicles.

Outlook The turbulence brought by the devolution of ministry of health, high inflation, depreciating currency and the adamant pricing policy remain significant challenges for GSK. With little activity in resolving the ongoing pharmaceutical sector woes, exports might be one window of opportunity for GSK, which is already exporting to a few regional peers. Exports contribute only around three to four percent to the firm's revenue with majority of it coming from Afghanistan and Sri Lanka.

With price freeze on a majority of products and the resultant squeeze on the margins, production of these products faces immense risk. Though long-term profitability and growth hinge on a balance between the need for affordable healthcare and essential commercial interest of the firm, exports to underdeveloped African countries like Nigeria can be the silver lining.

The potential of fetching export orders from Nigeria comes as positive news during tricky times. Pakistani diplomat to Nigeria, Ahmed Ali Sirohey has been reported to have lauded the Nigerian market prospects for local drugs. On a broader level, the biggest challenge for the pharmaceutical industry lies with the inconsistency in government policies. Besides removing such ills like counterfeiting, patent infringements etc, the government needs to be more consistent in the pricing area.



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GSK PAKISTAN

===================================================CY09 CY10 CY11 CY12

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Profitability

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Gross margins 25.3% 25.7% 26.8% 26.3%

Operating margins 10.5% 10.3% 10.5% 10.2%

Net margins 6.2% 5.6% 5.2% 5.7%

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Liquidity

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Current ratio 2.81 2.71 2.48 2.27

assets to liabilities 3.76 3.64 3.57 3.40

Equity ratio 0.73 0.73 0.72 0.71

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Efficiency

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Fixed asset turnover 4.37 4.51 4.56 4.00

Total asset turnover 1.16 1.27 1.41 1.43

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Market

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EPS (Rs/share) 5.22 4.42 4.33 5.02

P/E ratio 20.90 20.00 15.50 14.60

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Courtesy: BR


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