GlaxoSmithKline Pharma’s Q3 hit by weak metrics, recovery may take time
Extraordinary expenses worth ₹737 cr took a toll as the firm posted a loss of ₹644 cr. This has unnerved the StreetThird quarter revenue declined 6% year-on-year, well below the Street’s expectations
GlaxoSmithKline (GSK) Pharmaceuticals Ltd’s weak third quarter (Q3) results have derailed the stock’s recent performance. Slower revenue growth, higher expenditure and one-time write-offs dragged the profits down, much below the Street’s expectations. All this took the sheen off its stock, which slumped 12% on Tuesday even as the broader market soared.
Third quarter revenue declined 6% year-on-year, well below the Street’s expectations. The company’s multinational parent had voluntarily recalled ranitidine products globally, including Zinetac in India. But analysts had noted that the recall would not cause much damage. In fact, some had even expected the company to grow revenue marginally due to the growing push of its other brands.
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While that did not happen, its strong brand portfolio did help improve the gross margins in the quarter. Some of GSK Pharma’s brands are fast-growing on a high base. Nevertheless, this was not sharp enough to counter rising employee costs.
As a result, operating metrics took a hit. Ebitda (earnings before interest, taxes, depreciation and amortization) growth was lower than analysts’ expectations by as much as 30%. Ebitda margins remained weak at 16%, which indicates the company has not been able to manage its costs well either.
One-off write-offs further marred the performance. GSK Pharma made one-time adjustments related to the underutilization of manufacturing facilities and the impairment of some other assets. Added to this was about ₹17 crore as costs on litigation. All these extraordinary expenses summed up to ₹737 crore.
These write-offs took a toll on the company, and it reported a loss of ₹644 crore in Q3. That has unnerved the Street.
Adjusting for these write-offs, the net profit would have been about ₹92.7 crore. However, this would still be lower than what the Street had factored in by about 33%, implying that the company faced a tough quarter. “Adjusted net profit was up 9.3% YoY at ₹92.7 crore, our estimate: ₹140 on account of a lower tax rate," noted analysts at Motilal Oswal Financial Services Ltd in a recent note to clients.
A positive in the quarter was that some of GSK Pharma’s key promoted brands grew 20%, noted analysts. Still, while the short-term impact has been huge, the company’s long-term performance hinges on how quickly it can scale up some of the new drugs that it has launched recently.
Other factors that could impede growth would be a slowdown in the domestic pharma market and any of the drug maker’s brands coming under price control.
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