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GSK PHARMA 3QCY10: In-line; Improving growth traction; Marginal EPS upgrade; Buy
- GSK Pharma's (GLXO IN, Mkt Cap US$4.3b, CMP Rs2,244, Buy) 3QCY10 net sales grew 13.7% YoY to Rs5.82b (v/s est Rs5.65b) while Adj PAT grew 12.2% YoY to Rs1.58b (v/s est Rs1.57b).
- Domestic pharmaceutical revenues grew by 15% while overall sales (including exports) grew by 13.7%.
- Topline growth was led by the vaccine portfolio as well as gradual ramp-up in sales of new launches.
- EBITDA grew by 10.5% YoY to Rs2.09b (vs estimate of Rs2.07b) while EBITDA margin declined 100bp YoY to 35.9%. EBITDA growth was lower than topline growth due to adverse product-mix.
- Adj PAT grew by 12.2% YoY to Rs1.58b (v/s est of Rs1.57b).
Topline to grow in double digits; EBITDA margin to sustain at 33-35%
- GSK’s topline growth over the next two years will be led by focus on Priority Products which will sustain double-digit growth. This will be driven by expanding therapeutic and geographic coverage coupled with incremental contribution from new launches. We estimate 13% growth for CY10E and 15% for CY11E.
- We believe the company will be able to sustain EBITDA margin at ~35% despite the gradual increase in field force strength (200-300 per year). GSK’s strong brand-equity with doctors enables it to sustain premium pricing for many of its brands resulting in high profitability.
- The main products launched in the last few quarters include Benitec A in cardiology segment (Olmesartan in combination with Amilodipine, in-licensed from Daiichi Sankyo), Dermocalm in dermatology, Ventrolin CFC free inhaler (Salbutamol), Mycamine (anti-fungal, in-licensed from Astellas) and Esblanem (Meropenem) in Antibiotic segments.
Guidance
- GSK had, at the annual analyst meet (in Feb-2010), guided for 12-13% topline growth for next 2-3 years led by increasing volumes and new launches coupled with gradually expanding sales force.
- Although, management has not commented on the guidance post the 3QCY10 results, we note that the YTD performance is in-line with the guidance with topline growth of 13.4%.
- We note that given the high EBITDA Margins that the company enjoys, topline growth is imperative to drive earnings growth as we do not expect any significant ramp-up in the profitability in the coming years.
Aggressive new launches
- GSK is strongly committed to Indian operations, which is evident from the fact that 9 new products have been launched in CY08-10 period.
- This includes four vaccines including the latest Cervarix (cervical cancer vaccine for women) and Tykerb (anti-cancer). We believe that Cervarix, Rotarix (Rotavirus vaccine) and Eltrombopag (platelet aggregator, launch scheduled in CY10) hold good long-term potential.
- It has also entered into an in-licensing agreement for the injectable anti-fungal agent, Micafungin, with Astellas Pharma Inc, and has also signed a co-promotion agreement with Daiichi Sankyo for the antihypertensive drug Olmesartan Medoxomil and its combination products.
- In line with its strategy, GSK is gradually ramping up its presence in the high-growth lifestyle segments.
- Management has become more aggressive as far as new launches are concerned and has also commenced launch of branded generics (products belonging to other MNCs but not enjoying any patent protection) to fill in the gaps in its lifestyle portfolio.
Valuation and view
- We believe GSK is one of the best plays on IPR regime in India with aggressive plans to launch new products in the high-growth life-style segments. These launches are expected to bring in long-term benefits.
- We believe GSK’s topline growth is gradually improving with revenue CAGR of 14% for CY09-11 period. We believe that this growth trajectory will improve further in the long term and post CY13, as new launches start contributing meaningfully to the topline.
- Given the high profitability of operations, we expect this growth to lead to sustainable double-digit earnings growth and RoE of ~30%. This growth is likely to be funded through miniscule capex (Rs400m/year) and negative net working capital.
- GSK deserves premium valuations due to strong parentage (giving access to large product pipeline), brand-building ability and likely positioning in post patent era. It is one of the very few companies with ability to drive reasonable growth without any major capital requirement leading to high RoCE of over 45%.
- We have marginally upgraded our CY10E EPS estimates by 1.4% and CY11E EPS by 2.6%. Based on our revised estimates we expect GSK to record CY10E EPS of Rs69 (up 15.7%) and CY11E EPS of Rs80.3 (up 16.4%).
- The stock is currently valued at 32.5x CY10E and 28x CY11E earnings. Maintain Buy with a target price of Rs2,410 (30x CY11E).
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