GSK - exports can lift growth

Even the largest multinational pharmaceutical company in Pakistan is facing a constrained growth environment. The turbulence brought by the devolution of ministry of health, high inflation, depreciating currency and a capped pricing policy remain significant challenges for GlaxoSmithKline (GSK).
With little betterment in the countrys pharma industry environment, exports might be one window of opportunity for GSK, which is already exporting to a few regional peers. At present, however, exports contribute only around three to four percent to the firms revenue with majority of it coming from Afghanistan and Sri Lanka.
A number of factors slowed the pace of growth since the beginning of 2012, like suspension of the import quota of the pseudoephedrine raw material, lower government health spending and firms voluntary discontinuation of Chlorofluorocarbons (CFCs) as per global guidelines.
The lacklustre pharmaceutical companys performance during the first quarter of 2013 is an evidence of restricted growth and shrinking profits. GSKs revenues for the latest quarter witnessed moderate increase (nine percent year-on-year), despite substantial increases in selling, marketing and distribution (SMD) expenses. High cost of sales that accounts for 70-80 percent of the total revenues gobbled up whatever little topline gains that the firm achieved.
One would imagine that higher SMD expenses should have resulted in higher revenues. However, the uptick in SMD expense during 1QCY13 was partly because of greater branding efforts towards the consumer healthcare products, and partly because of the increased freight costs due to more expensive fuel.
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 hinges 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.

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GlaxoSmithKline Pakistan Limited

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Rs (mn)                           1QCY13      1QCY12         YoY

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Net sales                          6,352       5,833          9%

Gross profit                       1,761       1,731          2%

Marketing, S&D expenses              867         643         35%

Operating profit                     694         902        -23%

Profit after tax                     404         485        -17%

EPS (Rs/share)                      1.54        1.84        -16%

Gross margin                         28%         30%

Net margin                            6%          8%

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