GSK's operations are broadly divided into two segments, namely: pharmaceuticals (prescription drugs and vaccines) and consumer healthcare (over-the-counter medicines, oral care and nutritional care). The company is involved in the manufacturing of leading medicines including Augmentin, Seretide, Amoxil, Velosef, Zantac and Calpol and renowned consumer healthcare brands, which include Panadol, Horlicks, Aquafresh, Macleans and ENO.
GSK-NOVARTIS TRANSACTION: April 22, 2014 has gone down as an important day in the history of GlaxoSmithKline plc. On this day, the company announced a major 3-part inter-conditional transaction with Novartis AG. The deal involves Consumer Healthcare, Vaccines and Oncology businesses of the two companies.
With this deal, GSK and Novartis plan on creating a world leading consumer healthcare business, whereby GSK will have a controlling equity stake of 63.5 percent. GSK will acquire Novartis' global vaccines business (excluding influenza vaccines) in return for an upfront payment of $5.25 billion along with subsequent payment of up to $1.8 billion. On the other hand, GSK will divest its oncology business in exchange for a cash payment of $16 billion.
INDUSTRY FLASHBACK - THE KEY GLITCHES Times have not been painless for pharmaceutical companies in Pakistan. The dilemma of irrational pricing that started in CY12 has not been resolved yet. 2001 was the last time pharmaceutical companies were allowed a price increase on their products. Price adjustment on pharma products is something that the health ministry seems to have forgotten since then. In this regard, 2014 was a better year in a sense that the government at least realized the need to come up with a fair pricing mechanism. Yet, the outcome is still out of sight.
Thanks to the absence of a rational pricing mechanism for more than 12 years, Pakistan's pharmaceutical industry is ill-rated compared to its peers. Lack of FDA approved plants, disincentives to invest in research and development activities speak volumes of the lack of growth within this sector.
9MCY14: REVIEW OF FINANCIAL PERFORMANCE Looking at 9MCY14 performance of GSK, it seems likely that the company will close the year on a promising note. Top line grew by 10 percent year-on-year, thus retracing its growth levels achieved prior to CY12. To recall, the company posted a top line growth of as high as 25 percent in CY09, following which the trend has been declining, where it touched its lowest level of 6 percent in CY12. Here, declining top line growth is a clear manifestation of hard times pharmaceutical companies have been facing due to irrational pricing mechanisms prevailing in the country.
Gross margin sustained its level where rupee appreciation in most of the period seems to have done the trick. With the company spending lower on marketing initiatives, selling and distribution costs inched down a tad. This is perhaps the result of higher base effect as the company introduced new products in the preceding year hence higher expenses on marketing and distribution costs were inevitable. Owing to the aforementioned reasons, bottom line surged by39 percent year-on-year in CY13, with profit after tax clocking in at Rs 1,192 million.
GSK'S FINANCIAL PERFORMANCE IN 2013: 2013 ended on a demoralising note for GSK as its bottom line underwent a decline of 20 percent year-on-year. The culprits, however, remain the same as for any other pharmaceutical company in the country. Persistent currency devaluation during the period, soaring inflation and rising fuel and energy costs gobbled up whatever gains the company made from top line growth.
Top line grew by a decent 9 year-on-year in 2013. However, with cost of sales rising by a higher proportion, gross margin shed 100bps to 25 percent. Selling, marketing and distribution expenses saw a sudden jump led by new introductions and launches in Sensodyne and Horlicks ranges. As a result, net margin declined to 4 percent (2012: 6 percent).
GOING ONWARDS...By managing to diversify the product mix in the consumer healthcare business, pharmaceutical companies have been able to sustain their profitability. This coupled with the recent rupee appreciation against the greenback has kept the profitability within the comfort zone. Though, the persistent prize freeze on medicines may compel pharmaceutical manufacturers to divert their focus away from the core pharmaceutical business to consumer healthcare business. And this gradual drift towards expanding the consumer healthcare segment by leading pharmaceutical companies signals the need to incentivize firms to invest in pharmaceutical business. This cannot be achieved unless the government comes up with a fair and transparent pricing policy that takes into account the concerns of firms. If not done, the risk of smuggling of low quality medicines will continue to thwart the lives of patients.
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GSK Pakistan - Financial Highlights
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Rs (mn) CY08 CY09 CY10 CY11 CY12 CY13 9MCY14
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Sales 13,403 16,754 18,916 21,750 23,150 25,231 20,435
Gross Profit 3,856 4,239 4,853 5,818 6,045 6,224 5,359
Operating Profit 3,078 1,751 1,952 2,273 2,369 1,969 2,036
Profit Before Taxation 3,001 1,706 1,932 2,237 2,322 1,810 2,023
Taxation 1,046 665 874 1,096 995 748 830
Profit After Taxation 1,955 1,041 1,058 1,141 1,327 1,062 1,192
EBITDA 3,309 2,061 2,324 2,599 2,716 2,323 2,387
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Source: Company accounts