Successful companies don’t stand still. They’re always evolving. Today, I’m looking at the changes taking place at FTSE 100 pharmaceuticals giant GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) — and what they mean for investors.
Sales stagnation
Many companies have found sales growth hard to come by in the difficult economic environment since 2008. Pharmaceuticals companies have had the additional hurdle of a period of expiring patents on some of their biggest money-spinning drugs.
As a result, GSK’s turnover for 2013 of £26.5bn was around £2bn lower than five years ago, and analysts see no growth over the next two years.
Changing the shape of the business
GSK is in the midst of repositioning its business to focus on products and geographies where it sees the best prospects for future growth. Non-core assets are being sold to focus on ‘priority’ products, and exposure to emerging markets is being increased.
The strategy can be seen particularly well in the group’s consumer healthcare division where 50 non-core products have been divested over the last two years, including over-the-counter medicines in the US, Canada and Europe, and Lucozade and Ribena, which are primarily marketed in western markets. At the same time, GSK has increased its stake in its consumer healthcare subsidiary in India from 43% to 75%.
Looking to the future
Now, there is a downside to GSK’s strategy. While operating profit margins in the US and Europe are running at 70% and 55% respectively, the margin in the group’s Emerging Markets & Asia-Pacific (EMAP) segment is 31%, and in the consumer healthcare division as low as 18%. As such, the bigger the contribution EMAP and consumer healthcare make to group sales, the more they will pull down the overall profit margin.
I don’t think this is a problem for long-term investors. GSK should be able to grow sales at a good clip in emerging markets in the coming decades, while the sales power of strong consumer brands is legendary.
Furthermore, margins in these areas do have some scope to rise from current levels, due to increasing scale in manufacturing and distribution in emerging markets, and the newly-focused consumer healthcare division’s sales and distribution synergies with pharmaceuticals.
After the recent period of sales stagnation, I’m expecting GSK’s repositioning of its business, and a strong pharmaceuticals pipeline of regulatory approvals and filings, to begin to deliver increasing turnover and profit growth from 2015.
A valuation of 14 times that year’s forecast earnings, with a prospective income of over 5%, doesn’t look unappealing to me for a company gearing up to return to growth.
