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Shareholders can consider booking profits in the stock of GlaxoSmithKline Pharma (GSK Pharma).
At Rs 2,331, the stock trades at about 30 times its likely CY11 per share earnings, at a huge premium to large-cap peers. Though the company has always enjoyed premium valuations, driven by its strong balance sheet, high cash reserves (about Rs 1,948 crore, which equals cash per share of Rs 230) and attractive product portfolio, its present valuations leave little room for the stock price to appreciate.
This calls for at least a partial profit-booking by shareholders, especially those with a low-risk appetite. Absence of any significant revenue triggers in the near term and likelihood of margin pressure given the turnaround time for the newly added sales force to improve productivity could also keep the stock price capped.
Strong fundamentals
An entrenched domestic market presence, deep pockets to penetrate the Indian markets and access to products from its parent's stable make GSK Pharma a unique play. It enjoys a strong position in most of the categories in which its products are sold.
For instance, its acute care classic brands such as Calpol, Phexin, Cetzine, Neosporin, Cobadex CZS and Zyloric boasted growth rates better than the market in 2010. Rotarix, 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, too have done well in the year gone by.
Cervarix is the market leader in HPV vaccines segment as per IMS Sep 2010 audit. Last year Rotarix crossed the Rs 50-crore sales mark. As a result, GSK now enjoys a leadership position in the vaccines segment, with a 19.86 per cent share (as per MAT 12/2010).
GSK Pharma has strengthened its presence in the dermatology segment, helped by its parent's acquisition of the US-based dermatology company, Stiefel Laboratories, globally. The management has said that itss Stiefel-promoted range of products have started making visible progress. The segment recorded growth well ahead of the market growth in 2010, with GSK's key therapies — topical antibiotics, antifungal, emollients, sunscreen and acne — registering strong performance.
GSK enjoys a position of strength in the hospital and tender business. For the quarter ended December 2010, the company enjoyed a market share of 6.25 per cent, top slot, in the hospital segment as per IMS Hospital Audit.
New products
Product launches have helped the company add to growth opportunities. While some of the high-profile product launches of earlier years – Rotarix, Tykerb and Cervarix – have done well and hold immense growth potential, other launches such as Mycamine — which was in-licensed from Astellas, Parit D capsules and the re-launched Cefspan — have also met with good success. Revenues from new products made up over 7 per cent of the top line last year (CY10).
For the coming years, GSK has lined up a number of products from the branded generics space and from its parent's folio for launch in India. It has already received marketing approvals for Revolade and Votrient in the March 2011 quarter. Pneumococcal vaccine Synflorix, high-end antibiotics through in-licensing arrangements with other companies and branded generics in the cardiac and central nervous system segments, and speciality products in dermatology are among the other products lined-up for the year. With the company now open to differential pricing to suit the local market's dynamics, product launches can be expected to see decent demand.
The last few years have seen pharma companies — local and MNCs — aggressively add to their field force. GSK too had increased its field strength to about 2,900 agents by end of 2010. While the number doesn't compare favourably over some of the domestic peers, a strong product folio and the company's differentiated product strategy, with a focus on rural markets for mass therapies and on urban markets for chronic diseases, make it a strong contender.
GSK had in early 2011 said that it would add 500-600 sales personnel over the year. It has added over 550 sales agents in the first quarter itself. That said, it may take a while before the benefits from the newly added sales force begin to accrue.
Earnings scorecard
In the quarter-ended March 2011, the company managed a modest year-on-year sales growth of about 11.4 per cent to Rs 603 crore. The quarter also saw two new product launches — branded generic Calpol-T and Ansolar (Sunscreen Gel) from the Stiefel Dermatology range. However, profits sagged to Rs 46 lakh, driven by higher one-time provisioning – towards a liability in a drug-pricing case for which it has provisioned about Rs 161 crore (the final payout however is subject to the court's judgment).
Prior to exceptional items, profit after tax grew by 16 per cent. Operating margins for the quarter contracted by about two percentage points to 35.7 per cent.
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