Following the merger of Glaxo Wellcome and SmithKline Beecham in 2001, GlaxoSmithKline came into being. Since then GSK, by expanding tremendously over the years, has now become a pharmaceutical giant in Pakistan's pharmaceutical industry.
PRODUCT PORTFOLIO: GSK Pakistan's operations are dividend in two segments: namely, Pharmaceuticals (prescription drugs and vaccines) and consumer healthcare (over-the-counter-medicines, oral care and nutritional care).
The company produces the leading pharmaceutical brands which include Augmentin, Seretide, Amoxil, Velosef, Zantac and Calpol and renowned consumer healthcare brands, which include Panadol, Horlicks, Aquafresh, Macleans and ENO.
KEY EVENTS IN 2014: April 22, 2014, has gone down as a notable day in the success story of GlaxoSmithKline. GlaxoSmithKline plc UK has joined hands with Novartis AG, Switzerland to create a world-leading Consumer HealthCare business. As part of the arrangement, GSK plc will be holding a controlling equity stake of 63.5 percent. Moreover, GSK plc will acquire the global vaccine business of Novartis and divest its marketed Oncology portfolio. However, according to the company, the transaction is subject to regulatory approvals from the regulatory approvals in UK.
INDUSTRY DILEMMAS The list of issues faced by the pharmaceutical manufacturers in Pakistan is long and strenuous. And with years passing by, the fate of pharma companies is falling apart. Irrational pricing mechanism tops the list of this industry's woes. To recall, 2001 was the last time pharmaceutical companies were allowed to raise prices of their products. In an earlier published interview with BR Research, Ayesha Tammy Haq, Executive Director of Pharma Bureau Pakistan said: "Prior to 2001, every year, the government would adjust the prices of medicines based on a formula taking into account annual inflation and other factors. This formula would be applied across the board. Since then there has been no across-the-board price adjustment, where prices for the most have remained stagnant, barring a few hardship cases."
To counter the apprehensions and to create a level playing field, the government in July 2014, the government expressed its intentions to formulate a new pricing policy taking into account the considerations of all stakeholders. While industry participants have been lusting after the government to stimulate the process without any delay, its progress is still uncharted.
Not to disregard the bitter fact that successive governments have failed to come up with a rational pricing mechanism. One can hope that the government is able to come up a transparent pricing mechanism and ensure the quality of medicines produced, thus providing industry players an equal opportunity to survive and flourish.
2013: REVIEW OF FINANCIAL PERFORMANCE Faced by these pressures, GSK's profitability also bore the brunt. Net profitability underwent a decline of 20 percent year on year in 2013.
However, to ease the burden of price freeze on pharmaceutical drugs on profitability, GSK altered its product portfolio mix during the year. The company rose it's the proportion of its consumer healthcare segment to 14 percent from 11 percent in 2012. However, pharmaceutical segment, where price freeze is a concern, continues to capture the biggest slice of the cake.
Thanks to the rising proportion of consumer healthcare business of GSK, the dent on firm's margins stayed minimal, declining by 100bps during the year. The downfall in margin came primarily on the back of soaring cost of producing drugs. Soaring inflation particularly, increasing transportation costs, rising cost of raw materials, inclination in fuel prices have all led to uncontainable cost of sales, thereby suppressing margins. But with consumer healthcare business becoming stronger, margins can be expected to bounce back.
1H CY14: REVIEW OF FINANCIAL PERFORMANCE
GSK's struggles bore fruits in 1H CY14 with its bottom line boasting 11 percent year-on-year rise. Decent top line growth owing to alterations in the portfolio mix coupled with decline in expenses and finance costs are the key factors driving the bottom line growth during the aforementioned period. Rising cost of sales suppressed the gross margin which went down to 25 percent from 27 percent in the corresponding period of last year. However, with falling selling, administrative and distribution expenses and finance costs, net margins stayed flat at six percent.
WHAT'S AHEAD? Spiraling inflation, volatile currency movements, continuous energy crisis, surviving without parallel increase in selling prices is more like an uphill struggle. Not only has this kept a lid on industry's profitability, pharmaceutical manufacturers are wary of investing further in Pakistan. Perhaps, this is why few pharmaceutical players have winded up their operations in Pakistan over the last few years.
The government needs to incentivize the industry by balancing the concerns of poor patients and drug manufacturers to maintain the availability of quality drugs in the market. Excessive controls on pricing mechanism carry the risk of sub-standard and mediocre drugs being floated in the country.
Not to disregard, various business analysts even consider Pakistan's pharmaceutical sector as a sector with huge potential. However, much rests on the health ministry on how it tackles the prevailing industry issues and set the industry in motion.
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GSK Pakistan - P&L account
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Rs (mn) CY11 CY12 CY13 1HCY14
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Sales 21,750 23,150 25,230 13,569
COS (15,931) (17,105) (19,007) (10,164)
GP 5,819 6,045 6,223 3,405
Selling, marketing &
distribution expenses (2,790) (3,028) (3,635) (1,742)
Other income 462 330 455 240
Profit from operations 3,491 3,347 3,043 1,903
Finance cost (36) (47) (159) (7)
PBT 3,455 3,300 2,884 1,896
PAT 3,455 3,300 2,884 1,896
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Source: Company accounts
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