The thing that sets India's second-largest MNC pharma company, GSK Pharma, apart from the others is the patents owned by parent company GSK Plc. GSK Plc continues to launch most of its patented products, like in the past, through its listed Indian entity.
This association has paid GSK Pharma rich dividends. GSK's phenomenal 47 per cent (average) ROCE in the last five years is one of the highest in the industry (current RoCE at 47.8 per cent). GSK's PAT margins have averaged 25 per cent in the same period - again a feat that few pharma companies can match up with.
Strengths and Opportunities
A fine pedigree. GSK Pharma has a strong presence in high growth lifestyle segments of dermatology, respiratory and vaccines. Its parent company holds one of the largest patent portfolios in the world. Unlike other MNC pharma companies that take private company routes to launch money-making products, GSK's parent has proposed to launch most of its pipeline through its listed subsidiary - a big positive for minority shareholders. GSK Plc's strong product portfolio thus gives GSK Pharma a strong upside potential in a post IPR regime.
Aggressive launcher. In the last five years, GSK has launched more than 30 new products in the Indian market. The company plans to plug vacancies in the lifestyle segment with branded generics. The company has proposed to launch 2-3 new products in dermatology and one each in respiratory and oncology. Typically new launches take a couple of years to show results. Management has guided revenue growth in line with industry (13-15 per cent) led by new launches and growth in existing products.
Vaccines. Vaccines are an important portfolio for GSK. It is also where its strengths lie. CY11 saw GSK's vaccine business grow by 58 per cent (y-o-y). The company wants to take the share of vaccines from current levels of 11 per cent to around 17-18 per cent in the next 3-4 years. GSK launched Rotarix - a vaccination against rotavirus diarrhoeal disease - one of the leading causes of death in children under five worldwide. GSK is strongly placed here with little competition. Only two other companies - Merck and Pfizer - sell rotavirus vaccines in India. Also slated to be launched (mid CY13) is Infanrix hexa, a vaccine that will protect against six diseases including polio, hepatitis B, hib, diphtheria, tetanus, pertusis (DTP).
The NPPP scare. If there is one thing that punctuates the picture-perfect scenario for GSK in India, it is this dreaded four letter word - NPPP. The implementation of the NPPP or the New Pharma Pricing Policy could unsettle GSK's plans and fortunes.
What the NPPP proposes to do is to expand the scope of administered pricing from the current 74 drugs in the National list of Essential Medicines to cover all the 354 under control. Additionally, price controls are slated to be imposed on formulations of these drugs, any combinations of these drugs and all dosage strengths and not as per the prevalent practice of controlling bulk drug prices. All patented product manufacturers are expected to be impacted. According to estimates, GSK could see its revenue dip by around `150 crore (6.3 per cent of CY11 sales). Earnings by as much as 13 per cent.
GSK Pharma is one of the most expensive stocks in the listed pharma space. At a 5-year PEG ratio of 3.6, current valuations do not offer value. Hold out for some negative news before weighing in. GSK's strengths in the patented products portfolio make it stand apart from its peers. The company will have that advantage even in a post NPPP era. Wait it out.