GSK Pharma: in the recovery room
Since the start of fiscal 2017, GlaxoSmithKline Pharmaceuticals Ltd shares have lost a fifth of their value. The company’s financial performance has been hit by supply constraints in FY16 and some of that has continued into FY17 as well. Price controls have hurt too. These are expected to taper from FY17 onwards, however.
In the June quarter, sales grew by 8% to Rs.685 crore, but price cuts took away Rs.20 crore in sales, and supply constraints took away Rs.55 crore, disclosed the management in its annual analyst meet this week. In the 12 months ended March 2016, these constraints ate up Rs.350 crore worth of sales. The shortfall is blamed on shortages of vaccine supplies by the parent and a shortfall in active pharmaceutical ingredient (API) supply for Neosporin (an anti-infective). An API is the main ingredient used to make a formulation.
These constraints are easing in FY17 and will go away by the end of the fiscal year, according to a post-analyst meet note by Nomura Research. That should see sales growth recover progressively, with a low-base helping too. On the price control front, 23% of GSK Pharma’s sales in FY16 are in the essential list that is subject to price control. It expects little impact from the new additions to the list. But the price cuts for FY17 could see Rs.100 crore worth of sales (4% of previous year’s sales) getting affected, according to Nomura.
GSK Pharma is investing sizeable sums in expanding capacity. Its existing factory in Nashik has been upgraded and a new Rs.1,000 crore facility is being built in Karnataka. The new facility will be commissioned by end-FY17 or early-FY18 and should double capacity. This capacity will play a key role in driving the company’s growth in existing products while new ones will play their role too—it has launches planned in respiratory, diabetes and vaccines segments in the next three years. It will also minimize its exposure to drugs under price control.
The presentation does paint a picture of a company readying for a growth push and GSK Pharma has also indicated that margins will get back to the 18-20% levels in the next two-three years, according to Nomura. The start-up of the new factory may hit margins in the near term, till it stabilizes and reaches optimal capacity levels.
If all goes according to plan, one should see GSK Pharma’s sales growth recover in the current fiscal year and beyond. The fall in its share price then raises the question if a bounce can be around the corner. Nomura does not think so, maintaining a “reduce” rating on the stock, citing its valuation of 59 times its price-to-earnings ratio based on FY17 projected earnings. It attributes this relatively high valuation to expectations of the parent making a delisting bid.