Neutral GSK Pharma Ltd for the Target Rs.3,000 by Motilal Oswal Financial Services Ltd
Specialty gains offset by base portfolio headwinds
Fire at CMO site further impacted supplies in the quarter
*GlaxoSmithKline Pharmaceuticals (GLXO) delivered lower-than-expected revenue/EBITDA (8%/5% miss) in 1QFY26. However, PAT was in line with expectations due to higher other income. The quarterly performance was impacted by disruption from one of the suppliers.
* GLXO has been transforming its offerings in the domestic formulation (DF) segment through the addition of specialty products.
* It is gearing up for gynaec-onco launches in the near term. New products are innovative and exclusive from the GLXO basket, and the traction is expected to be promising over the medium term.
* With leadership in pediatric vaccines, GLXO is also implementing efforts to create considerable awareness for an adult vaccine (Shingrix).
* The general medicines category faced headwinds due to industry slowdown.
* We cut our estimates by 5%/2% for FY26/FY27, factoring in a) the adverse impact on supplies of certain drugs due to constraints at a CMO facility, and b) moderation of prospects in dermatology/respiratory covered markets. We value GLXO at 45x 12M forward earnings to arrive at a TP of INR3,000.
* We expect 12% earnings CAGR over FY25-27 for GLXO. While new launches are enhancing patient satisfaction and driving growth for GLXO, the base portfolio is affected by industry headwinds, keeping overall earnings growth in check. Maintain Neutral rating on the stock.
Operational miss; earnings in line
* Revenue marginally dropped 1.2% YoY to INR8.1b (est: INR8.8b).
* Gross margin (GM) expanded 50bp YoY to 64.3%, as its key promoted brands gained market share and outpaced market growth.
* EBITDA margin expanded 290bp YoY to 31.2% (our est: 28.7%) due to a significant cut in other expenses and steady employee costs YoY (other expenses down 280bp YoY as a % of sales).
* EBITDA grew 9%YoY to INR2.5b (vs. est. of INR2.7b).
* PAT grew 12.4% YoY to INR2.1b (in line with our est. of INR2.1b).
Key highlights from the management commentary
* The YoY growth for the quarter was impacted by supply constraints from one of the CMOs and weakness in anti-infectives/derma therapies.
* GLXO is launching oncology drugs (Jejula/Jemperli) in India market soon. About 20 key account managers have been appointed for promotional activities of these drugs.
* GLXO’s vaccines portfolio saw 8.6% YoY growth in 1Q. In general medicines, there was no new introduction in the quarter.
* The company sells 9-10k Shingrix doses every month. GLXO can garner INR1b in sales on annual basis from this product.
* Volume declined 2% YoY in general medicine category for the quarter.
* Specifically, Calpol and nutritional supplements were impacted by a fire incident at one of the CMO sites.
* About 60% of the procurement is outsourced by GLXO for India business.
Management call highlights
* A fire incident at a CMO facility affected volumes by 2%, especially for key brands like Eltroxin and Calpol, resulting in a 1% volume decline.
* GLXO expects to sustain vaccine business growth at 8-10% in the medium term.
* About 53k/20k new patients are diagnosed with ovarian/endometrial cancer every year in India. Out of these, GLXO is targeting 5k/1k patients to be treated by Zejula/Jemperli.
* The company has enhanced awareness about Shingrix through digital screening as well as refreshed in-clinic visibility. Shingrix witnessed 24% QoQ growth in Rx units in 1QFY26.
* General medicine category was impacted by softer-than-expected seasonality tailwinds and an increased pace of competition.
* Field productivity has been largely stable for GLXO.
Reiterate Neutral
* We raise our earnings estimates by 5% each for FY26/FY27, factoring in 1) the higher benefit of marketing efforts in the vaccines segment and 2) the reorganization of operational costs.
* We value GLXO at 44x 12M forward earnings to arrive at a TP of INR3,040. Considering a 15% earnings CAGR over FY25-27 and priced-in valuation (45x FY26E/39x FY27E earnings), we reiterate our Neutral rating on the stock.
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