GSK Pharma: Near term headwinds may keep stock prices under pressure

April sales were the worst among top drug players

The GlaxoSmithKline Pharma (GSK Pharma) stock has dipped 7 per cent from its May highs, on worries that lower incidence of acute infections could lead to a fall in sales. Some brokerages have downgraded the stock due to a weak near-term outlook. 

Vinay Bafna and Sriraam Rathi of ICICI Securities have reduced their net profit estimates for FY21 and FY22 by 12-14 per cent, factoring in the near-term pressure caused by Covid-19, adoption of a healthier lifestyle, and social distancing that will affect acute therapy sales.  

Worries on the acute therapy front arise from the April show. GSK was the worst performer in the domestic formulations market in the month. Sales fell 19.2 per cent year-on-year in value terms, and 22 per cent in volume terms. While the overall pharma market fell 11.7 per cent, the impact on GSK was higher, given its acute-heavy portfolio which accounts for 67 per cent of sales. 

 

 

Uncertainty over the divestment of its Vemgal plant (Karnataka) was another factor. The company reported a loss of Rs 644 crore in Q3, which included impairment charges of Rs 737 crore for the plant and other costs. 

This impairment was on account of the decision to recall stocks of antacid Zinetac last year. Any further impairment  would aggravate concerns. The company indicated last week that it would discontinue the production and supply of Zinetac tablets in India. 

The move to discontinue Zinetac and other low-margin brands has, however, helped boost margins. GSK reported its all-time high gross margin of 64 per cent in the March quarter, with its focus shifting to key large brands over the last few quarters.

While the reported operating profit margins, at 22.4 per cent, was among the highest in many quarters, analysts believe that in the current environment, it would be  difficult for the company to sustain these levels.   

The firm is targeting double-digit sales growth and margins at 23-25 per cent.  

Despite the challenges, the stock is trading at an expensive valuation of 36x its 1-year forward earnings estimate. While its revenue and margin trajectory could improve in the medium term, the near-term roadblocks could keep the stock under pressure.