GSK Pharma

Shareholders with a two-three-year investment horizon can retain their exposure to the stock of GlaxoSmithKline Pharma (GSK Pharma). A strong first quarter performance, planned launches from the company's product pipeline and the parent GSK plc's strong focus on growth from emerging markets underscore our optimism.

These apart, a strong balance sheet, significant cash on hand (about Rs 1,672 crore as on December 2009) and a total exposure to the domestic market add to its appeal. However, despite the many positives, the stock's present valuations appear a tad expensive.

At the current market price of Rs 1,905, the stock trades at 29 times and 25 times it’s likely CY-10 and CY-11 per share earnings. Sure enough, the company has always commanded premium valuations, but the present ones seem stiff and may leave little room for upside in the near-term.

Shareholders nevertheless can continue holding the stock given its strong long-term fundamentals; fresh exposure can be considered, should there be a significant fall in price linked to broad market weakness.

What drives growth

GSK Pharma has always commanded premium valuations, thanks to its MNC tag, clean balance sheet and a market positioning that affords it better vantage to benefit from the product patent regime.

While these arguments still hold good, what has added sheen to its investment appeal is a slew of high-growth potential product launches. Ratarix, the rota-viral diarrhoea vaccine; Tykerb, the breast cancer drug, and Cervarix, the first vaccine with a potential to prevent select strains of cervical cancer, are some of its recent launches that, over the years, hold potential to become big revenue spinners.

Over the past year, some of the company's main product launches include Benitec A, Dermocalm, Ventrolin CFC free inhaler, and Esblanem.

Products launches hold the key to future growth is apparent from the company's performance in the just-ended March quarter too. It scaled 18 per cent revenue growth, largely helped by product launches. It launched Mycamine, an antibiotic in-licensed from Japan-based Astellas, and strengthened its portfolio in the dermatology segment (estimated to be Rs 2,000 crore market).

Dermatology segment revenues were helped by its parent's acquisition of the US-based dermatology company, Stiefel Laboratories, globally.

While GSK had a presence in the domestic derma market, its coverage was limited to 60 per cent. This has now improved to 90 per cent with the global acquisition of Stiefel Laboratories Inc.

For the coming year, the company has lined up several products for launch including vaccines, Infanrix-Hexa (a six-component vaccine) and pneumococcal vaccine Synflorix; notably regulatory filings with the Drug Controller General of India have been completed for the two vaccines.

It also plans to launch three products (two are patented) in the oncology segment and has indicated that the patented products would be priced differently in the local market.

It has also indicated at the launch of some branded generic products.

While new product launches are likely to drive its growth, note that it may take a couple of years for the upside from such launches to assume critical mass.

Improving market reach

With most pharma companies (both local and MNCs) increasing their domestic focus, it will be the market reach and product portfolios of companies that will become key growth differentiators.

While GSK Pharma scores well on the product front, it will have to improve on its field force if it were to capture a larger share of the domestic market.

Notably, the company has added 200 people to its field force last year, and plans to continue adding to its field strength each year in the coming years.

Though this helps, it still stands pale when compared with some domestic pharma companies that boast of larger field force.

However, the company has done well to position itself, as preferred in-licensing partner for pharma companies, which want to widen their presence in the domestic market, as also for those looking to establish their footprint in the fast-growing Indian pharma market.

GSK’s access to molecules from its parent's stable too promises growth in the medium term.

Earnings scorecard

For the coming year, the management has guided for a sales growth of over 12-13 per cent (in line with industry growth), with a focus on prescription-led growth.

This appears achievable given the company's product pipeline and strengthening field force.

For the quarter-ended March 2010, the company managed a broad-based sales growth of over 18 per cent, spread across all therapeutic segments, particularly vaccines and dermatology. It also improved its operating margins helped by its focus on power brands.

Decreasing dependence on drugs under the ambit of price control also helped; coverage of price-controlled products reduced to 27 per cent this quarter, compared with 29 per cent last year. Operating margins improved by over 100 basis points to 37.6 per cent.

via BL