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Nath Balakrishnan

Mr V. Thyagarajan, Vice-Chairman... Firing on all cylinders.

FRESH exposures can be considered in the stock of GlaxoSmithKline Pharma, which now trades at Rs 292. The company, which declared encouraging numbers for the year ended December 2002, continues to be one of the better MNC pharma plays available to investors.

Financial performance: For the year ending December 2002, the company posted net sales of Rs 1,047.2 crore, up 3.65 per cent compared to Rs 1,010.3 crore in the corresponding previous period. The core pharmaceuticals business, which contributes over 80 per cent of the company's sales, grew in lockstep with the industry's growth rate of about 8

per cent.

The failure of the topline to grow at the same rate has to do with the slackness in the performance of other divisions such as fine chemicals and animal healthcare as also the fall in exports.

The company's focus on improving manufacturing efficiencies and clamping down on expenses has also paid off, looking at the operating profit margins.

For the year ended December 2002, the company posted an operating profit (net sales less expenditure) of Rs 173.7 crore, representing an operating margin of 16.6 per cent.

Correspondingly, for the year ended in December 2001, the operating profit stood at Rs 104.6 crore and the operating profit margin at 10. 4 per cent. Profit after tax (before exceptional items) at Rs 128.4 crore has jumped 70 per cent over the profit of Rs 75.3 crore posted for the year ended December 2001.

After accounting for exceptional items, which include the cost of VRS and expenses incurred as part of rationalisation initiatives, net profit at Rs 98 crore jumped by over 120 per cent compared to Rs 43.9 crore for the same period in the previous fiscal.

Business outlook: The company has continued to remain marketing-oriented by focussing its efforts on its strong brands. This is in line with its intention to retain its position of market leadership, apart from growing profits at a significantly higher rate than sales.

Glaxo has a strong presence in such areas as antibiotics, where Augmentin and Ceftum are its key brands; vaccines, and respiratory segments. The company has also launched Zyban, which is a prescription drug for smoking cessation.

Going forward, growth would hinge on the manner in which Glaxo is able to propel its prescription drugs business.

The backing of one of the largest sales force of medical representatives would undoubtedly play a pivotal role in Glaxo growing its prescription drugs business.

The other area that needs to be looked at is the transition that would take place in terms of the change from a process patent regime to a product regime, come 2005.

Pharma companies are wary of bringing in products of their parent, as there is always the possibility of it being replicated by companies in India at much lower prices.

The advent of the new regime would certainly suit MNC pharma majors such as Glaxo, as they would be in a position to bring in products that are part of their global portfolio without running the risk of cheaper duplication.

Stock outlook: At the current price of Rs 292, the stock trades at a PE multiple of 22 times its year ending December 2002 earnings.

Though valuations might appear to be a trifle on the higher side, the company's impressive financial performance coupled with its strong parentage could certainly merit a look-in from investors with a long-term perspective.

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