Margin pressure, pricing policy risk and rich valuations may hold back the stock of multinational pharma major GlaxoSmithKline Pharma. The stock currently trades at 24.5 times its 2014 earnings, a 30 per cent premium to the industry. Given the risks to growth and margins, the valuation premium may not sustain. Investors can consider booking profits in the stock.
Investments yet to pay off
Glaxo’s domestic growth has lagged both the industry and peers such as Sun Pharma and Lupin over the last few years. Even as other Indian counterparts made significant strides in the home market by expanding reach in the semi-urban areas and rolling out new drugs, the company took some time to catch up. Glaxo’s efforts to step up growth are yet to pay off, thanks to the stiff competition.
The company has increased its sales force by over 80 per cent in the last four years. But the benefits from new additions are yet to accrue on account of rise in attrition levels across the industry. This has led to a 20 per cent drop in the average productivity per medical representative for Glaxo over the last four years.
Margin dilution
Further, a drying innovative product pipeline of its parent forced the company to shift focus towards vaccines and branded generics. Branded generics being very competitive, Glaxo is yet to see meaningful revenue flow from new launches.
According to data compiled by market research firm AIOCD AWACS, new molecule launches did not generate considerable sales in 2012. Growth was largely driven by volume and price growth in existing products and their variants.
Glaxo has been scaling up presence in the anti-diabetes and cardio-vascular through new launches. But late entry and stiff competition have curbed the company’s pricing power in these chronic therapies. Aggressive promotion at the retailer end by peers, to encourage switch from high cost brands to the cheaper ones, is also impacting growth.
Glaxo has been losing steam to competition, with a 0.9 per cent decline in market share during the last five years. Within the specific therapy areas barring vaccines, the company has been losing share in most therapies.
For instance, Glaxo’s market share in the hormone supplements segment slipped from over 24 per cent in 2008 to 18 per cent currently. Similarly, the company lost over 3 per cent share in the ophthalmology segment over the last five years. This is based on data compiled by pharma market research firm AIOCD AWACS.
Growth at cost of margins
Vaccines currently constitute nearly 13 per cent of the company’s sales. Glaxo managed to double its share in the vaccines segment on the back of healthy demand for its pneumonia vaccine Synflorix.
This was made possible by pricing the product at over 50 per cent discount to its competitor Pfizer’s Prevnar-13. As a result, despite healthy growth, margins slipped in the vaccines segment. Further, as the company imports bulk of its vaccines from its parent, a weak rupee led to a further squeeze in the segment’s operating margins.
Also, higher promotional spend and wage costs on expanded field force dragged Glaxo’s overall operating margins, which declined from nearly 34 per cent in December 2011 to 30 per cent currently. While vaccines may continue to support Glaxo’s growth, margins in this segment may remain under pressure in the near term.
Pricing policy to hurt
Next to Wyeth, Glaxo may be the worst hit if the new drug policy is implemented in its current form. The new policy proposes to cap the price of essential drugs at the average price of brands with over one per cent share in the market. Glaxo’s top selling anti-infective brand — augmentin — figures in the revised essential drug list.
With annual sales of almost Rs 500 crore, this brand constitutes nearly 20 per cent of the company’s revenues. The brand costs 2.5 times more than the lowest priced brand in the same category. According to an estimate by AIOCD AWACS, the new drug policy, if implemented, may impact Glaxo’s revenues by over 9 per cent. From around 24 per cent currently, the company’s proportion of revenues which may be subject to price control may rise to nearly 35 per cent under the new policy.
Financials
The company’s revenues grew by a sedate 9.8 per cent to Rs 2,651 crore in 2012 (year ending December), compared with the previous year. Operating margins declined by over two percentage points to 30.5 per cent . Profits grew 5.2 per cent to Rs 662 crore during the same period.