Pill for the long term

Updated: Feb 25 2007, 06:23am hrs
As the food and finance industry gains popularity among investors, the pharmaceutical sector cannot stay behind in the race. In the pharmaceutical industry GlaxoSmithKline (GSK) has emerged as a major player and has a strong presence in the domestic market. It has 5.2% market share in the industry.

Business

The company is a market leader in qualigens fine chemicals (QFC) business and commands a leadership position in the hospital segment. It has two manufacturing units in India, located at Nashik and Thane. The company is also a leader in segments like dermatologicals, corticosteroids, vaccines, thyroid, vozet and cetzine in anti-histamine.

It has hived off the agrivet farm care business to Virbac Animal Health India, a subsidiary of Virbac SA, a European company for a total consideration of Rs 207.10 crore.

Growth drivers

The company's pharmaceuticals business registered a 10% growth and has contributed 88.65% in FY06 to total revenues of Rs 1416.02 crore. This is due to an active promotion of priority products and a shift from the acute disease to the chronic disease segment. Short-term illness like cold is a type of acute disease and illness related to heart disease and asthma are types of chronic disease. The company has been growing at a CAGR of around 12% for last 4 years.

The company's bottomline has shown a tremendous growth of 33.41% CAGR in the last 4 years. It has also shown an improvement in the operating margin from 19% in FY03 to 30% in FY06.

Outlook

To acquire long-term and loyal customers the company is aggressively shifting its focus from acute diseases to chronic diseases. This will lead to consistent and incremental growth and may prove to be a trigger for the scrip. The diabetes segment is one of the fastest growing therapeutic areas in India. The recently launched Windamet medicine, which is a leading brand in the diabetes segment, will be a positive factor.

The stock is quoting at 18 times trailing annualised earnings and this is less than the peers like Pfizer. The stock has not performed in the market in the last one year. As the company introduces more products in FY07 the margins will be under pressure on account of promotional expenditure.

The focus on the pharmaceutical market in the near future can hamper the leadership position in the QFC business and the growth prospects, as it has shown a growth of 183.21% in the last quarter ended December 2006 compared to the corresponding quarter last year. Delisting of the stock in the foreseeable future cannot be ruled out.