Price revisions, new products should add to GSK Pharma's top-line growth

Brands, vaccines to drive margins for GSK Pharma

GlaxoSmithKline (GSK) Pharmaceuticals, which had a subdued September quarter, is expected to improve its profitability on the back of portfolio rationalisation, price hikes and an expanding vaccines business.

While GSK will continue to make and sell over 70 brands, growth is expected to be driven by 20 key brands in areas where there is significant unmet patient need. The firm’s strategy of rationalising its portfolio is looked at in positive light by analysts as it will lead to better margins. Ranjit Kapadia of Centrum Broking expects profitability to improve due to price revision for products that are not under price control and additional sales from the vaccine portfolio acquired from Novartis India as well as new vaccine launches. GSK derives about 20 per cent of its revenues from the vaccines segment, which is expected to grow at a faster pace. 

The firm’s top 35 brands contributed 77 per cent to its revenues. Of these 35 brands, 12 grew faster than the market growth rate of 11.7 per cent. Analysts expect them to drive growth supplemented by new launches across categories.

The company has also started manufacturing validation batches at its new Vemgal facility in Karnataka, taking it closer to commercial production. The facility will initially supply a range of solid dose forms and may be expanded to incorporate other dosage forms.

The stock has, however, not been delivering on the returns front both on account of muted September quarter numbers as well as high valuations. On a high base of last year, due to channel re-filling in Q2 FY18 post GST implementation, revenues declined 2 per cent in the September quarter. With operating margins at 20.5 per cent, though impressive, the decline of 250 basis points over same quarter last year was basically due to one-time non-operational expense of ~118 million on account of restructuring that led to higher other expenses too. 

The stock is currently valued at 34 times its FY20 estimates and any correction can be used by investors to add the stock to their portfolio from a long term perspective.