GSK Pharma -Benefit of product mix offset by lower operating leverage

0
57

Revival in revenue growth delayed by COVID-19-led crisis
 GSK Pharma (GLXO) reported an all-time high gross margin (GM) of 64%. The
company has been curtailing low-margin products and focusing on key
brands for the past four quarters. The benefit of these actions is now finally
reflecting on the margin. GLXO remains focused on the Anti-Infectives,
Dermatology, and Anti-Pyretic therapy areas through enhanced MR
productivity and better engagement with healthcare professionals.
 However, we reduce our EPS estimate by 2.4%/1% for FY21/FY22 to factor
COVID-19-led weakness in Anti-Infectives and other acute therapies. We
continue to value GLXO at 37x 12M forward earnings to arrive at a price
target of INR1,300 (from INR1,320 earlier). Maintain Neutral .
Superior margins, led by better-than-expected earnings
 Sales grew ~3% YoY to INR7.8b (our est.: INR8.0b), led by better traction in
the Anti-Infectives, Dermatology, and Anti-Pyretic therapy areas.
 GM improved sharply by ~460bp YoY and ~610bp QoQ to 64%, supported by
a change in the product mix.
 The EBITDA margin improved by a mere ~70bp YoY to 22.4%, weighed by
lower operating leverage (employee cost / other expenses up 260bp YoY /
130bp YoY as a percentage of sales), which offset the benefit of a better GM.
 EBITDA increased ~6.4% YoY to INR1.7b (our est.: INR1.4b). Adj. PAT was flat
at INR1.3b (our est.: INR1b).
 For FY20, sales stood at INR32.3b (+3% YoY), EBITDA at INR6.6b (9% YoY),
and Adj. PAT at INR4.8b (+15% YoY).
Key highlights
 Adjusting for tail-end brand rationalization, sales growth was healthy at 13%
for FY20. Furthermore, key brands saw 20% growth on a YoY basis.
 GLXO is exploring options, including the potential sale of the Vemgal site.
 Most of GLXO’s top 10 products grew at a healthy rate during the quarter.
Its largest product (Augmentin) grew ~20% YoY and its third largest product
(Calpol) ~25% YoY.
 Of GLXO’s top three therapies (contributing ~55% to overall sales),
Pain/Analgesics posted the highest growth with 22.3%, followed by AntiInfectives (+15% YoY) and Hormones (+10% YoY).
 The Menveo vaccine (launched in Dec’19) for meningococcal disease is
showing robust traction, with 30% unit share.
Valuation and view
 With the focus on key brands, meaningful (290bp) improvement has been
witnessed in the EBITDA margin over FY18–20. The benefit of a superior
margin profile is expected to be counter-balanced by muted revenue growth
(led by slowdown due to COVID-19) and reduced operating leverage. The
earnings CAGR of 22% over FY20–22 may look aggressive on account of a
significant reduction in the tax rate.
 We reduce our EPS estimate by 2.4%/1% for FY21/FY22 to factor COVID-19-
led challenges. Accordingly, we reduce our price target to INR1,300 (from
INR1,320 earlier) at 37X 12M forward earnings. We maintain Neutral as the
valuation adequately factors the upside.

READ  Drug pricing regime: Pharma companies express relief, health activists miffed

LEAVE A REPLY

Please enter your comment!
Please enter your name here