GSK Notes: We Have More Sales Reps in Emerging Markets than in West

GlaxoSmithKline's earnings call on April 28 was pretty routine, with no big surprises – nice growth, health care reform and all that, but executives did an interesting albeit somewhat shallow, dive on emerging markets.

GSK is one of the few, if not the only, Big Pharma to break down its emerging markets operating margins, which is laudable considering interest in the region (Even as pharma emerging markets sales skyrocket--and they were up 45% for the quarter at GSK--profitability isn't transparent).

Tim Anderson of Sanford Bernstein picked up on this topic, one of his favorite themes, on the earnings call: GSK's operating margins in emerging markets, at 36%, for example, is only slightly more than half of its margins in established markets. "Where do you think operating margins and emerging markets can realistically go from here over the next three to five years given what is likely to be a continual pricing disparity?" Anderson asked.

That led CFO Julian Heslop to respond: "Difficult to predict the future"…but 36% operating profit margin in any business is "excellent." And emerging markets don't require the heavy R&D investment that Western markets demand, so cost of goods sold is lower. If pharma R&D costs tend to run about 16% of sales overall, the products emanating from the labs account for only a third of emerging market sales, Heslop said. So a thumbnail calculation could charge a third of R&D costs to emerging markets.

After all, R&D priorities are driven by Western demands, chimed in CEO Andrew Witty. His further point: GSK's definition of emerging markets does not include Southeast Asia, Australia, or Japan, which GSK breaks down separately Clarification: Its emerging markets group consists of 10 countries, and does include India and China. That's important because GSK's Indian business is huge –Witty couldn't help pointing out that it is in the top three manufacturers of all types in India (GSK doesn't break down sales that far, though).

Overtime, GSK should be able to better leverage its growing infrastructure investment in emerging markets as it expands its sales capacity (not only for its own home-grown products; it has an aggressive in-licensing program specifically focused on bringing in late-stage products to sell in emerging markets, with its most visible success to date its alliance with Amgen to sell Prolia). And growing it is, both organically and through bolt-on acquisitions. Of the 11 bolt ons it did in the past year, most were in emerging markets, Witty said.

"For the first time over the last 3, 4, 5 months, we actually have now more sales personnel in the emerging markets than we do in America and Europe combined," he added, "…a pretty big shift." After all, he reminded investors, "This is one of those moments where we are seeing fundamental economic shifts go on in the world economy."

Moreover, Witty noted--and here's a comment to wake you up: "every dollar spent on SG&A in emerging markets in the past two years has been paid for by a dollar taken from Western budgets."