GlaxoSmithKline Pakistan Limited

GlaxoSmithKline Pakistan Limited’s (PSX: GLAXO) presence in Pakistan dates back to 1951, as Glaxo Laboratories Pakistan Limited. In 2001, GlaxoSmithKline Pakistan Limited came about as a result of a merger between SmithKline and French of Pakistan Limited, Beecham Pakistan (Private) Limited and Glaxo Wellcome (Pakistan) Limited.

The Company is a subsidiary of S.R. One International B.V., based in Netherlands, while its ultimate parent company is GlaxoSmithKline plc, UK (GSK plc).

GSK has its operations in two business segments: pharmaceutical that includes prescription drugs and vaccines; consumer healthcare which consists of over the counter medicines, oral and nutritional care.

Within Pakistan’s industry, GSK primarily operates in the respiratory, vaccines, dermatological, gastrointestinal, oncology, urology, and central nervous system among others.

Shareholding pattern

The company is largely held by its holding company S.R. One International B.V. which has close to 83 percent stake in GSK Pakistan. Around 7 percent is distributed with the local general public followed by public sector companies and corporations at around 5 percent. Of this State Life Insurance Corporation of Pakistan holds around 3 percent. The directors, CEO, their spouses and minor children hold a very insignificant portion.

Historical performance

GSK Pakistan has throughout the decade had a positive bottomline with topline growth also following the same trend with the exception of CY14 when it saw a negative growth rate.

The company experienced subdued topline growth in CY15- at 4 percent. The pharmaceutical segment posted a single digit growth rate of 4 percent. The lower growth was due to supply side issues. The consumer healthcare segment, on the other hand, fared better, with a growth rate of 14 percent. This was primarily driven by sales of Sensodyne, Panadol, and Horlicks. While there were marginal changes in other elements, other income of the company doubled to reach Rs 1 billion. This was due to sale of land and other non-current assets amounting to Rs 867 million. This was the factor which lifted operating and net margins for the year.

During CY16, topline registered a growth rate of nearly 16 percent. The consumer health care of the company was decided in CY15 to be a separate entity. The sales recorded in CY16 include sales made to GSK Consumer Healthcare Pakistan Limited. The pharmaceutical segment posted a decent growth of around 10 percent coming from Antibiotics, Dermatology, Respiratory and Analgesics. Distribution costs although showed an increase in numbers; however, as a percentage of revenue it had declined. In CY15, other income soared due to a one off sale of fixed asset, yet in CY16 other income still remained high due to insurance claim on account of a fire incident that took place. Additionally, the company also received promotional allowance from GSK group, which was recorded under ‘other income’. This helped in keeping the operating margins high but the higher tax expense impacted the net margins.

In CY17, the pharmaceutical sector of the economy saw the lowest growth at 6.4 percent. This was due to a number of factors such as few new product launches, increased government purchases and a notable decrease in patients coming from Afghanistan for medical reasons. GSK Pakistan on the other hand experienced a double digit growth rate in its topline of almost 19 percent. Apart from its sales made to GSK Consumer Healthcare, there were major orders placed by the Punjab Government. While there were negligible changes in other factors of the financials, finance cost, although made less than 1 percent of the revenue, saw a year on year increase by nearly 5 times due to exchange loss recorded under ‘finance costs’. Thus there was only a marginal change in profit margins.

GSK Pakistan Limited saw its lowest topline growth during CY18 at a little lower than 4 percent. This was largely due to the uncertainty with respect to 2018 being an election year for the country. Manufacturing cost inclined as a percentage of revenue, consuming 75 percent of topline. A Rs 4 million increase was seen in costs of raw material and packaging. Note that it is an industry-wide phenomenon to import raw materials. With a weakened currency, cost escalation was inevitable. Distribution costs were driven by higher fuel prices, hence higher freight and transportation costs. Other income was again high due to promotional allowance, while exchange losses increased finance costs. Thus net margins saw a marginal increase.

A slight recovery was made in CY19 as topline growth was recorded at a little over 7 percent. Cost of manufacturing increased as a percentage of revenue, taking up almost 79 percent of the revenue. This is the highest seen in more than a decade. It is largely driven by cost of raw materials which increased in response to exchange rate fluctuations, while salaries also saw a notable increase. The pharmaceutical sector has a major part of the employees in the sales section. Promotional allowance kept other income figure high which allowed operating margins to fall only slightly despite a notable decline in gross margins. Finance costs were again driven by net exchange loss, this time combined with interest on short term borrowings.

Future outlook

For a long time, the pharmaceutical sector of the country was restricted due to strict price controls. The new 2018 drug pricing policy, which allowed increase in drug prices by 9 percent for those that were already allowed an increase under hardship cases and 15 percent for the remaining drugs, brought some relief. However, since it was the first price increase seen in about 18 years, there is still a long time to go for the sector to recover. The fact that China, which is one of the main supplier of raw material, had to shut down half of its plants due to environmental concerns. This created a shortage of raw material supplies, which further adds to the industry’s woes.