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Industry headwinds hurt performance of generic medicines

* Glaxo Pharma (GLXO) delivered better-than-expected 2QFY25 performance. The robust growth in the specialty and pediatric vaccine segments was offset by headwinds in the generic medicine segment.

* We raise our estimates by 4%/5%/4% for FY25/FY26/FY27 to factor in: 1) new launches in the oncology segment, b) superior show in the specialty segment, and c) better operating leverage. We value GLXO at 46x 12M forward earnings to arrive at our TP of INR2,800.

* In addition to robust traction in brands such as Nucala and Trilegy within the specialty segment, GLXO plans to expand its offerings in the specialty segment. However, industry-level growth hurdles in generic medicines are offsetting some benefits of the specialty segment. Considering 13% earnings CAGR over FY25-27, and expensive valuations of 47x/41x FY26/FY27 earnings, we reiterate our Neutral rating on the stock.

Operating leverage offsets segment mix and drives margins YoY/QoQ

* GLXO’s revenue grew 5.6% YoY to INR10b (vs. est.: INR9.7b).

* In 2QFY25, GLXO posted 6% YoY volume growth and 1% price decline YoY.

* Gross margin (GM) dipped 100bp YoY at 62%, due to a change in product mix.

* EBITDA margin expanded 160bp YoY to 31.8% (our est: 26.1%) due to lower employee expenses/other costs (down 30bp/230bp YoY as % of sales).

* EBITDA grew 11.1% YoY to INR3.2b (vs. est. of INR3b).

* Adjusted for extraordinary income of INR47m for sale of residential property, PAT grew 13.9% YoY to INR2.5b for the quarter (our est. INR2.3b).

* In 1HFY25, GLXO’s volume grew 5.5% YoY, with price hikes of 1.5% YoY.

* For 1HFY25, revenue/EBITDA/PAT grew 6%/27%/29% YoY to INR18b/ INR5.5b/INR4.3b. We expect 6%/15%/5% YoY growth in Revenue/EBITDA/ PAT in 2HFY25.

Key highlights from the management commentary

* The company will launch ovarian and endometrial cancer drugs in 2HFY25.

* Management expects that the growth momentum in pediatric vaccines will sustain in 2HFY25 as well, with 13% YoY growth in 1HFY25.

* The growth of acute therapies is slightly suppressed during the quarter.

* GLXO expects that the growth in 3QFY25 in the general medicine category would be higher due to seasonality and delayed monsoon.

* To increase the penetration of adult vaccination, the company is collaborating with private clinics and hospitals.

* During 1HFY25, field force productivity improved 22% YoY.

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