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Buy GlaxoSmithKline Pharmaceuticals Ltd For Target Rs.1,805

Margins to expand beyond Cx sale

We attended the GSK Pharma analyst meet. The management highlighted that the ongoing global specialty focus by Plc would enable India share of specialty going up over the coming decade. The recent launch pipeline holds Shingrix, Trelegy, indication expansion for Nucala and Fluarix Tetra. The management is confident on Nucala upcoming expansion given the patient reach expansion by 4x.

Considering the healthy launch pipeline, the management is confident of expanding EBITDA margins beyond the Cx transaction. Valued at 16x EBITDA and 6x Sales, closure is expected in FY22E. We have adjusted for near-term EBITDA impact (1-1.5%) by reducing estimates by 4.5% for FY23E. Maintain BUY. We are optimistic on future pipeline including Covid vaccine.

Vaccine availability could be on fast track if trial results favorable

Globally, the GSK group is working with Sanofi and Medicago to harness the adjuvant technology in developing Covid-19 vaccines while also collaborating with CureVac to develop mRNA vaccines that have the potential to address multiple Covid-19 variants that are emerging across the world. Sanofi is conducting phase 3 trial in India; post the trails completion, GSK would be able to share more details.

Management believes Cx transaction is fairly valued

GSK India entered into an agreement GSK Asia (consumer arm of GSK plc) to sell Iodex and Ostocalcium brands (Cx) for Rs16.49bn, valued at 16xEBITDA / 6xsales. Management believes valuation is fair, as GSK only owned the distribution rights for the brands. This Cx transaction would impact the EBITDA for FY23 by ~Rs1bn.

Core brands and vaccines to drive growth

The key focus brands under pharma account for ~70% of revenue and have registered a growth of 14% in the last five years. The management expects this trend to continue for the pharma segment. The vaccine business grew at ~10% CAGR over the last five years and is expected to grow faster ahead, with new vaccine additions. According to the guidance provided, vaccine margins would be ~9-10%, largely considered as distribution margins. We believe if core Pharma brands continue to grow at mid-double digits, then EBITDA margin expansion with some support from operating leverage should allow margin expansion beyond Cx transaction.

Valuation and risks

The management strategy is to drive growth by following the three pillar approach: Grow, Build and Shred. The top-20 focus brands continue to be key growth drivers. Building new specialty brands (parent’s pipeline) would enable room for focused growth. We expect 2-3 innovative product launches in India in the coming fiscal, followed by oncology pipeline. The management focus on improving cost efficiency should be earnings accretive. The divestment of two brands has come at much better valuation post the Vemgal asset sale. We have increased the valuation multiple for GSK to 41x FY23E and arrive at a TP of Rs1,805. At CMP of Rs1,575, the stock trades at 42x FY22E EPS of Rs37.5 and 36.1x FY23E EPS of Rs43.6. Maintain BUY.

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