GSK's pullback from low-margin contract manufacturing drags on results

10-Feb-2020 - Last updated on 10-Feb-2020 at 14:28 GMT

(Image: Getty/Limpido)

GSK blames retreat from low-margin contract manufacturing for flat fourth quarter performance of consumer health unit.

Previously, GlaxoSmithKline combined its consumer health division with that of Pfizer to create a joint venture (JV). GSK is now preparing the Pfizer consumer health joint venture to operate as a standalone operation independent of its branded prescription drug business.

Iain Mackay, CFO at GSK, provided an update on the joint venture on the company’s fourth quarter results conference call, noting the impact on sales of a shift in its contact manufacturing strategy.

Mackay said, “Revenues of the new consumer healthcare JV were up 2% on a pro forma basis, despite a drag of around 1% from the combined impact of divestments and the phasing out of low-margin contract manufacturing.”

GSK’s phasing out of low-margin contract manufacturing hit the wellness division of its consumer health joint venture. The loss of contract manufacturing business offset growth of pain medicines, such as Panadol (paracetamol) and Advil (ibuprofen), resulting in flat sales at the wellness division on a pro forma basis.

The decision to phase out contract manufacturing work that generates revenues, albeit at a margin below that desired by GSK, has fed into an investor debate about the trade off between profitability and growth at consumer health companies.

GSK’s decision to pull back from low-margin contract manufacturing contributed to flat performance at the consumer health unit in the fourth quarter and restricted it to a 2% increase in sales for the full year. In effect, GSK sacrificed growth to get out of low-margin work.

James Gordon, an analyst at JPMorgan, used GSK’s conference call to sketch out why some investors are questioning whether consumer healthcare companies in general are striking the right balance between growth and margins.

Gordon said, “There has been some debate from some investors who ask whether consumer companies need to sacrifice some of the increase in the high profitability they have been achieving to invest more to actually get faster growth.”