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Dermatology outshines, while Anti-Infectives drags down 4Q

Enhanced marketing efforts, COVID impact lead to market share gains

* GSK Pharma (GLXO)’s 4QFY21 performance was marginally below estimates, largely led by moderate YoY sales growth for the quarter. Based on AIOCD data, strong growth in the Dermatology segment was offset by a weak performance from the Anti-Infectives and Pain Analgesics segments.

* We raise our EPS estimates by 6%/7% for FY22E/FY23E, factoring in a) a robust outperformance from Dermatology, b) strong revival in AntiInfectives, Pain Analgesics, and Vitamins/Minerals/Nutrients, partly supported by the opportunity arising from COVID. We continue to value GLXO at 38x 12M forward earnings (25% discount to its three-year average) to arrive at TP of INR1,580. We maintain Neutral on a limited upside from current levels.

Sales growth loses momentum in 4QFY21

* GLXO’s 4QFY21 revenues grew 5% YoY to INR8.1b (est. INR8.4b), led by double-digit growth in select brands.

* The gross margin (GM) contracted 540bp YoY to 58.6% due to a change in the product mix. However, the EBITDA margin contracted by a lower rate of 140bp YoY to 21% on lower employee cost (-370bp YoY as % of sales).

* Accordingly, EBITDA was down 1.5% YoY to INR1.7b (est. INR1.8b).

* GLXO recognized an exceptional charge of INR1.2b from a) impairment – to reflect the estimated realizable value of Vemgal assets of INR1.3b and b) the reversal of provisions – on account of the Zinetac recall of INR80m

* Adjusted for the same, PAT grew 5% YoY to INR1.3b (est. INR1.4b) for the quarter.

* FY21 revenue was largely flat YoY at INR32b, but EBITDA/PAT grew 6%/4.5% YoY to INR6.9b/INR5b

Key highlights

* As per AIOCD data, GLXO’s top therapy, Derma (~28% of overall sales), saw healthy growth of ~26% YoY in 4QFY21, contributing to overall growth.

* Vaccines (~17% of sales) posted 14.3% YoY decline and the Anti-Infective therapy (~22% of sales) saw 12% YoY decline in 4QFY21, per AIOCD – impacting overall growth.

* Betnovate/T Bact among the Derma products saw 41%/31% YoY growth in 4QFY21. The Infanrix vaccine saw growth of 10% YoY in 4QFY21. Augmentin (top Anti-Infective brand) declined 17% YoY for the quarter.

* On a 12M basis, GLAXO took a price hike of 6.7%, offset (to some extent) by flat new launches and volume decline of 12.7% on a YoY basis.

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

* GLXO is tracking well in recently launched products (Fluarix Tetra and Menveo); it has maintained its leadership in Dermatology and posted market share gains in the Anti-Infectives and Pain therapies.

Valuation and view

* We increase our EPS estimates by 6%/7% for FY22E/FY23E, factoring in higher sales of brands such as Augmentin in Anti-Infectives, Calpol in Pain Analgesics, and Betnovate combination brands in Dermatology, led by superior marketing efforts and market share gains. Accordingly, we expect a 21% earnings CAGR over FY21–23.

* We value GLXO at 38x 12M forward earnings to arrive at TP of INR1,580. We maintain Neutral as current valuations adequately factor in the upside

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