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Step change in growth and business mix

* We attended the analyst meet of GSK Pharma to gain an insight on the growth outlook over the next 2–3 years.

* GSK Pharma has prioritized its efforts towards specialty and vaccines, while it continues to gain market share in general medicine.

* Accordingly, it expects 130–330bp margin expansion to 23–25% over FY21–26.

* We reduce our EPS estimate by 5% for FY23, factoring in the sale of the Iodex and Ostocalcium brands. We value GLXO at 38x 12M forward earnings to arrive at TP of INR1,550. We maintain Neutral as current valuations adequately factor in the earnings potential from renewed strategy.

Differentiated products from parent to be launched in next 2–3 years

GLXO expects a double-digit CAGR in specialty drugs over FY21–26, supported by the parent’s pipeline. Growth would be driven by new launches, such as Nucala (already launched) and Benlysta (under registration). GLXO will targets new launches over the next 3–4 years, especially in Onco therapy, such as Zejula from the parent portfolio. It is also looking at a ramp-up in Nucala with state and central agency registrations. It is considering Sotrovimab (a COVID drug) for India, subject to approval / supply surety.

New launches / Better penetration to drive Vaccine business

* GLXO expects a high-single-digit CAGR in vaccines over FY21–26, with new product introductions such as Shingrix. The parent would help GLXO introduce new vaccines in India. The Vaccine business was heavily impacted in FY21 due to COVID, but GLXO expects ~10% growth in FY22 as COVID cases decline. Being largely a Distribution business, Vaccine operating margins are in the high single digits. Adult vaccinations are another interesting large opportunity for GLXO.

* GLXO’s parent is developing two COVID vaccines, one with Sanofi and another with Curevac. These are currently undergoing global trials and would be considered for India when appropriate, depending on the trial outcome.

Efforts underway to sustain market share gains in general medicine

* GLXO expects key promoted brands to grow 14–15% YoY over the near term. Currently, ~10 key brands account for 70% of general medicine. It expects the remaining brand sales to remain largely flat going forward. GLXO has decided against re-entering the Ranitidine market. Margins have taken a hit recently due to price increases in the Paracetamol API.

* 35% of its products are manufactured in-house, and it has enough capacity to cater to an increase in demand.

* It would receive INR16.5b in pre-tax from the sale of the Iodex and Ostocalcium brands to GSK Asia. The sale would have tax implications

Valuation and view

* We cut our EPS estimate by 5% for FY23, factoring in the sale of two key brands Iodex and Ostocalcium to GSK Asia. We expect a 10%/14% sales/earnings CAGR for GLXO over FY21–23E. We value GLXO at 38x 12M forward P/E to arrive at our TP of INR1,550. We maintain our Neutral rating as valuations adequately factor in an upside on renewed strategy.

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