GSK Pharma's underperformance to continue

While there are some signs of sales revival, re-rating would require consistent growth

Muted sales performance coupled with higher valuations has resulted in pharma MNC stocks such as GlaxoSmithKline Pharmaceuticals (GSK Pharma) and AstraZeneca hit their 52-week lows this week. The GSK Pharma stock has been on a downtrend since the start of FY17 (down 26 per cent), as supply issues and policy headwinds from regulatory pricing hit the firm.

Both the national list of essential medicines (NLEM) and the ban on fixed drug combination have had a bigger impact on MNC pharma stocks than on the more diversified domestic players. While MNC pharma companies get almost the entire revenue stream from India, the India share for the top 10 domestic pharma companies, barring Alkem (73 per cent), is less than 44 per cent.

Given the higher revenues from top brands, the increasing list of NLEM products, especially in the anti-infective segment, has eaten into sales and profits of MNCs. The top 10 brands for GSK Pharma, Sanofi and Pfizer contribute 50-52 per cent to their FY16 sales, while the same was below 30 per cent for the top 5 Indian pharma companies. To compensate for the revenue impact, companies are focusing on improving volumes, launches, reducing bonus units and improving productivity of medical representatives.

The top MNC pharma companies have also been underperforming the domestic market growth over the past year. According to the All India Organisation of Chemists and Druggists, for the 12 months ended August, GSK Pharma posted a growth of two per cent versus 10.5 per cent for the overall pharma market. Anti-infective is the biggest therapy segment for GSK Pharma (29 per cent of revenues). Its single largest brand Augmentin, an antibiotic, accounting for nearly Rs 300 crore of annual sales falls in this category. Sales growth has largely come from volumes and higher sales in products such as Calpol, an analgesic, which saw its trailing 12 months revenue improve 26 per cent. However, growth in July and August has, according to IMS, improved. Led by the pain & vaccines segments, growth is now at double digits against single digits in the last months.

While analysts say the company’s sales are improving, as supply disruptions have eased and the NLEM impact has reduced, the key trigger could be vaccine sales. GSK Pharma has become the biggest private player in the vaccines market after the acquisition of Novartis’ portfolio. Share of vaccines to overall sales is expected to improve to 23 per cent at the end of FY17 against 14 per cent in FY16.

While these are positives, the stock is trading at an expensive 59 times its FY17 earnings. Rerating depends on consistent sales and margin improvement, which seems unlikely in the near term.