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Better operating leverage drives profitability Better prospects with improving MR-Doctor-Patient connect

* GSK Pharma (GLXO)’s 3QFY21 performance was better than estimated, with an increase in sales driving higher profitability (on account of operating leverage). With the intensity of YoY decline lower over the past two quarters, GLXO exhibited low-double-digit YoY growth with the easing of the lockdown and partly aided by the low base of the past year.

* We increase our EPS estimates by 8%/3%/2% for FY21/FY22/FY23E, factoring in strong recovery in key therapies and improving productivity. We continue to value GLXO at 38x 12M forward earnings (25% discount to its three-year average) to arrive at TP of INR1,500. Maintain Neutral.

Strong sales growth drives earnings beat as operating leverage kicks in

* GLXO’s revenues grew 10% YoY to INR8.6b (v/s est. of INR8.3b).

* The gross margin (GM) expanded 110bp YoY to 59% on increased share of higher value products.

* The EBITDA margin expanded at a higher rate of 800bp YoY to 24% on account of lower other expenditure (-400bpYoY as % of sales) and lower employee cost (-280bp YoY as % of sales).

* Accordingly, EBITDA grew 65% YoY to INR2.1b (v/s est. of INR1.8b).

* Glaxo recognized an exceptional item of INR105m from the reversal of provisions on account of the Zinetac recall (INR89m) and profit on the sale of property (INR18m).

* Adjusted for the same, PAT grew at a slower rate (v/s EBITDA) at 57% YoY to INR1.5b (our estimate: INR1.2b) due to a higher tax rate for the quarter.

* In 9MFY21, revenue declined 3% YoY to INR23.9b, but EBITDA/PAT grew 8%/4% YoY to INR5.2b/INR3.7b.

Key highlights

* As per AIOCD data, GLXO’s top therapy Derma (~26% of overall sales) saw healthy growth of ~15% YoY in 3QFY21, which contributed to overall growth.

* Vaccines (17% of sales) posted flat sales YoY, while the Anti-Infective therapy (26% of sales) saw a 5.5% decline in 3QFY21 (per AIOCD) – this impacted overall growth, to some extent.

* Betnovate/T Bact in the Derma segment saw 27%/24% YoY growth in 3QFY21. The Infanrix vaccine saw growth of 49% YoY in 3QFY21. Augmentin (top Anti-Infective brand) declined 4% YoY for the quarter.

* On a 12M basis, GLAXO took a price hike of 6.0%, offset (to some extent) by volume decline of 13% on a YoY basis.

* GLXO has recently launched products such as (a) Nucala (to treat pediatric indication related to Hypereosinophilic syndrome), b) Fluarix Tetra (for the prevention of Influenza), and c) Menveo (a vaccine to prevent meningococcal disease).

* Moreover, GLXO’s parent has an R&D pipeline of 35+ potential new therapeutic drugs and 15 new vaccines under various stages of development.

Valuation and view

* We increase our EPS estimates by 8%/3%/2% for FY21/FY22/FY23E, factoring in better traction in sales, led by better patient-doctor-medical representative (MR) connect; expect a 13% earnings CAGR over FY20–23E.

* We value GLXO at 38x 12M forward earnings to arrive at TP of INR1,500. We remain positive on the new introduction from the parent portfolio and improving profitability on account of product rationalization. We maintain Neutral, as current valuations adequately factor in the upside.

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