GlaxoSmithKline Pakistan (GSK)

September 25, 2012

RECORDER REPORT

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With over a decade of operations and leadership, GSK is the largest pharmaceutical company in the country. GlaxoSmithKline is a market leader in terms of sales value, sales volume and number of prescriptions. GSK was created on January 1, 2001, through the merger of SmithKline and French Pakistan Limited, Beecham Pakistan (Private) Limited and Glaxo Wellcome (Pakistan) Limited.

The company operates in two industry segments within the pharmaceutical sector: pharmaceuticals which include prescription drugs and vaccines and consumer healthcare which includes over-the-counter (OTC) medicines, oral care and nutrition.

Highlights Calpol, Augmentin, Amoxil, Ampiclox, Velosef and Zantac are some well known medicines by GSK in Pakistan. The pharmaceutical company's brand Augmentin became the first to cross the three billion rupee-mark in the history of pharmaceutical industry during the preceding year.

During CY11, the company was ranked number one in terms of value, volumes, and prescriptions as top eight, top 10 and top six products out of 20 in terms of value, volume and prescription, respectively belonged to GSK.

GSK launched five new products into the market in the previous year. These included drugs for cancer, meningitis, pneumonia, typhoid, nasal and ocular symptoms, urological diseases and gastro-enteritis. During the current year CY12, the company plans to bring in new pharmaceutical brands and consumer healthcare products to solidify their leadership position further.

Revenue highlights for 1HCY12 The challenging macro economic environment in the country and adverse law and order situation affected the supply. However, GSK was able to churn satisfactory sales growth of eight percent during 1HCY12 over similar period last year. In addition, the export revenue stood at Rs 344 million during 1HCY12, growing at a robust rate of 44 percent YoY and representing around three percent of total revenues primarily from Afghanistan and Sri Lanka.

The pharmaceutical segment grew by 8.6 percent over 1HCY11. This does not include large government tenders. Within the pharma business, anti-diarrheal, anesthetics, analgesics, cough/cold, CNS portfolio, respiratory, gastro-intestinal, and vitamins achieved strong double-digit growth during 1HCY12. The legacy brands continued to maintain momentum.

The other business segment, consumer healthcare witnessed exorbitant growth of 23.3 percent during the said period with sales crossing Rs 1.3 billion mark. The major contributors to the sales of consumer health care segment were Horlicks, Panadol and Sensodyne especially with line extensions of these brands.

Profitability amid costs Around 80 percent of the company's expenses are the cost of sales, and any fluctuation in input prices and supply constraints would explain much of the route taken by the profits of the company.

Over the last five years, the gross margins have been shrinking constantly due to rising cost of raw and packing material, higher inflation, depreciating local currency, and escalating fuel prices. Moreover, the gross margins have also been eroding due to stagnant prices of various products.

Though the reasons like inflation, depreciation of currency and rising cost of material, packing and energy remain intact, the company was able to curtail cost of sales through rationalisation and cost cutting methods. During 1HCY12, GSK witnessed an increase in gross profits by 13 percent as compared to the same period during the previous fiscal, primarily on account of better sales volumes and product mix resulting in non-symmetrical increase in revenues when compared to input costs.

Though the government did improve prices on certain medicines, according to the company, these price increases were not sufficient to absorb inflationary pressures. Thus, the bottom line of the company during the first six months of CY12 shrank by five percent YoY and there exists a massive difference between the gross margins and the net margins.

The single digit net margins are beleaguered by company's rising marketing, selling and distribution costs and administrative expenses. The 24 percent YoY increase in these costs ride on the heavy investment in the brands, and high oil prices translating into high freight and distribution costs. However, the cost-cutting mechanism helped the company to keep administrative expenses tame.

Debt and leverage position The pharmaceutical sector is a low-leverage sector. The company too operates with no debt on its books. The short-term solvency position has improved gradually from current ratios of as high as five in CY06 to 2.48 in CY11 and 2.42 in 1HCY12.

During 1HCY12, GSK carried out capital expenditures worth Rs 768 million for plant modernisation, plant improvement, capacity enhancement and purchase of vehicles. On the current assets side, the surplus funds of the company decreased due to dividend payout, upgradations and capital expenditure. These were also the reasons for a fall in other income of the company, besides the operation income.

Outlook The year has remained stressful due to internal and external challenges. For the pharmaceutical industry, the turbulence brought by the devolution of Ministry of Health, high inflation, depreciating currency and the adamant pricing policy remained critical issues year round.

With upgradation and modernisation plans, GSK also plans to launch new pharmaceutical products into the market. As a priority, the company has plans to further strengthen its consumer health care business. Although the company bears comparatively lesser risk on account of its market leadership position, quality regulation issues, particularly affecting the company in the international markets, ongoing energy crisis, counterfeit drugs, patent expiration, bureaucratic procedures, intellectual property rights issues and transparency in pricing mechanisms are serious issues of the sector.

Though the sector has a lot of potential, it remains heavily price-controlled which the players think is a severe blow to their operations in the industry. It is time that the authorities take immediate steps to approve a pricing policy that is flexible across the board in order to stop the shortage of drugs in the near future. An issue which is unique to the country is that with the passing of the functions of MoH to provinces under the 18th amendment, concerns loom over the future of the regulatory framework of the industry. Much of the viability of the pharmaceutical companies depends upon the development in this regard.