Glaxosmithkline Pharma: Vaccine business to help maintain margin lead

Despite posting a modest performance for its fourth quarter ended December 2010, GlaxoSmithKline Pharma closed the year 2010 on a positive note. The company has grown across all its business segments and is on track to maintain its target of growing at close to 12-13 % annually . The company’s net sales for the quarter grew at a modest rate of 10.4% while its net profit rose by 11.7%. Higher raw material and employee costs ate into the operating-profit margin leading to its drop by 90 bps to 30.7%.

In the quarter, GSK’s core pharma business grew 11.4%. The company registered good growth in its mass market, mass specialities and specialities businesses such as oncology, dermatology and cardio-vascular ; with the launch of new products into the branded generic segment and increase in footprint in rural areas and hospitals. Its vaccine business, which contributes 8% to total revenues , grew the fastest at 24%. The 2,100-crore company is now the number three player in the Indian pharma market.

Its pharma business, though, continued to grow below the industry growth rate. The company functions as a pure generic company and is not restricting itself at launching the products of its parent company . It is in-licensing products of other pharma companies, too, and has plans to introduce 5-6 products in the current year. GSK is also investing in beefing up its field force. The company expects to increase the contribution of its high-margin vaccine business from the current 8-9 % to around 15% in the next two years.

This move will help maintain its margin despite its proposed in-vestment in product launches and increasing field force. GSK already enjoys one of the highest profit margins of 35% in the industry. The company’s stock is trading at a trailing price-to-earnings multiple of 32.5. These are premium valuations the company well deserves, considering its growth trajectory, parentage and strong product pipeline.