GSK gets a big boost from tighter low-end portfolio

Revenue growth, margins have been trending up over the past couple of quarters

The GSK Pharma stock has been one of the biggest gainers in the pharmaceutical space, rising about 38 per cent over the past three months. The surge comes on the back of the success of its strategy to focus on its top brands, discontinuation of lower-value products and streamlining supply-chain related issues.

After underperforming its peers over the past couple of years, the company is back on the growth track. Nitin Agarwal and Nirmal Gopi of IDFC Securities believe that the company seems to have turned the corner in terms of clocking double-digit revenue growth over the past few quarters after a prolonged period of slow growth and supply related disruptions.

The immediate trigger has been the September quarter results. Adjusted for the discontinued and rationalised portfolio of lower-value or tail-end brands, revenue growth stood at 16 per cent. This was supported by a volume growth of 11 per cent. The growth in revenues was aided by an extended monsoon. Higher occurrence of infections boosted sales of its portfolio of anti-infectives and pain medications. These two categories posted growth of 20-25 per cent in the September quarter.

One of the key changes in strategy has been the increase in focus and promotion of its top 20 brands such as Augmentin (antibiotic), Calpol (fever/pain relief ), and Synflorix (vaccine), among others. The promoted brands have recorded a growth of about 20 per cent each. Analysts at B&K Research believe that the sales growth momentum witnessed in the quarter is likely to sustain given dominance of GSK’S brands in respective therapeutic groups. New launches last year (asthma, vaccines) have done well and those that have been lined up should expand the portfolio while increasing revenues.

In addition to the strong top line growth, the improved product mix and robust seasonal demand helped push up the operating profit margins. The company has posted margins in excess of 20 per cent for the third consecutive quarter. Margin improved by 180 basis points to 22 per cent over the year-ago quarter. With the commercial operation of the Vemgal plant in 4QFY20, margins should improve further as it will reduce dependence on third-party suppliers.

In addition to operational triggers, the recent changes in the tax structure will also be beneficial for GSK. The effective tax rate is expected to come down from 36 per cent in 2018-19 to 25 per cent in 2019-20.

However there are a couple of areas that investors should keep an eye on. The first is the progress on sales of heartburn drug ranitidine, which accounts for about 5 per cent of sales. The company’s global parent initiated a worldwide recall after cancer causing impurities were found in lab studies. The company took a one-time hit of ~110 crore in the quarter due to the recall. The other is on the valuations front. The sharp run up means that the stock is trading at 48 times its 2020-21 (FY21) estimates. This is at a sharp premium to listed pharma multinationals such as Pfizer (24x) and Sanofi (29 times) of the FY21 earnings. While there is little doubt about the reversal of fortunes for GSK, investors should await a better entry point.

Meanwhile, GSK Consumer Healthcare on Thursday said it has re-launched Crocin Pain Relief in the country with new packaging.