Glaxo India: Hold

Recommendation: Hold

Sanjiv Shankaran

GLAXO India's share price lost Rs 177 (35 per cent) since March this year to hover around Rs 332.

The drop in Glaxo's market value is quite a change from the situation three years ago when Glaxo's share price began to rise significantly on the back of a fancy valuation for pharmaceutical companies with multinational parentage.

A huge change in valuation now has come about following a more realistic appraisal of the operating environment for pharmaceutical companies in India. To get a better idea of the change, look at the current operating environment and expected changes in the sector.

Tougher operating environment: Simply put, Glaxo as well other MNCs operate in an adverse environment. The Indian market is perhaps in the grip of the most severe competition ever in formulations (drugs, such as tablets that can be immediately consumed). It is charaterised by relentless price-cutting, thereby, affecting realisations of everyone in the market.

Unlike Indian companies, Glaxo is unable to introduce a number of products and use sheer volume of drugs sold to neutralise weak growth in the value of drugs sold. This is so because MNCs do not introduce molecules where they do not hold the original patent or have licensing rights. In India, the patent laws place no such restrictions on local companies.

When Glaxo has introduced new products from its parent's portfolio -- under patent elsewhere -- Indian companies have been able to duplicate the drug and launch at a much lower price. Glaxo finds it difficult to keep up with price competition because it does not have complete autonomy over pricing.

Most MNCs have to follow the lead set by the parent when it comes to pricing products still under patent in the developed markets.

Back to the future: The present conditions will not last much longer. By 2005, India should have product patent laws in place that would make copying a patented drug illegal. That environment would make it easier for Glaxo to launch a new product without constantly looking over the shoulder for less expensive competition.

Following the shareholder approval for the merger with SmithKline Beecham Pharma (SmithKline shareholders get one share of Glaxo for two shares held) Glaxo will, eventually, have the largest company in the domestic market.

Size would be backed by a parent's product basket as well as research pipeline strong in anti-infectives, vaccines and respiratory segments. All three segments hold good potential in India, but in the near future, the parent's rich product basket may not help. But over the long term, it could place Glaxo in a comfortable position.

Glaxo operates in a tough environment that has had an adverse impact on its financial performance over the last two years. There is unlikely to be significant improvement in the next two years. Investors can avoid fresh exposures to Glaxo for now.

Existing shareholders, on the other hand, can stay invested because there is a possibility of an improvement in the stock's valuation. Price control on drugs may be loosened this year and Glaxo, with about 60 per cent of its product basket under control, may benefit in a sentiment-driven rally.