Citi :: GSK Pharma:: No Surprises; Steady Growth Continues

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Glaxosmithkline Pharmaceutical (GLAX.BO)
Alert: No Surprises; Steady Growth Continues
 No surprises — GLAX continued to post steady numbers for the quarter (4Q
sales up 12%; recurring net income up 15%) and for the year (revenues up 13%,
PAT up 14%) in line with our estimates. The business remains on solid ground &
we expect steady growth rates to continue (new launches, sales force addition).
We however see limited scope for re-rating in the near term & maintain our Sell
(3L) rating with TP of Rs2,030.

 4Q performance in line — Revenues (Rs5.0bn, +12% YoY) and PAT (Rs1.2bn,
+15% YoY) were in line with expectations. Growth was strong across all segments
- mass markets, mass speciality, specialities including dermatological, oncology,
critical care and vaccines. EBITDA margins were lower (c90bps lower than our
expectations) at 31.4% (-66bps), owing to higher RM/Sales (up 152bps). Higher
interest income (+57% YoY, +20% QoQ) compensated for lower EBITDA resulting
in steady PAT growth (+15%YoY).
 Good CY10 — Steady growth in revenues (+13% over CY09) and PAT (+14%
over CY09) is in line with our estimates. Addition of sales force and launch of new
products resulted in growth across all business segments. The company’s special
focus on branded generic launches, rural penetration and the hospital segments
also aided growth across businesses.
 Other data points/trends — a) Attained leadership in Cervical cancer vaccine
Cervarix; b) To hire additional sales force of 500 in CY11; c) Launched two
dermatology products during CY10 – to launch 4-5 products from the Stiefel basket
to augment dermatology portfolio; d) Launched two in-licensed products
(Mycamine & Parit D) during CY10 – looking for in-licensing of more products; e)
Entered statins segment during CY10 and launched two products.
 Remains expensive — On account of the in-line performance in CY10, we
maintain our estimates for CY11 and CY12. We also remain positive on GLAX’s
long-term prospects in India, but the stock appears expensive at 28xCY11E EPS,
in context of the c14% EPS CAGR over CY10-12E. Maintain Sell.
Glaxosmithkline Pharmaceutical (GLAX.BO; Rs2,196.60; 3L)


Glaxosmithkline Pharmaceutical
Valuation
Our target price of Rs2,030 for GSK Pharma is based on 25x March 2012E
earnings. Given its steady earnings growth, we believe P/E is best suited to value
GSK Pharma. GSK has traded at 15-60x in the past 7-8 years, with a median of
c.23x over the last five years. Over the past year, GSK has launched its first
patented product and announced plans to launch few more over the next two
years. While we expect greater clarity on the implementation of the IPR regime
over the next few years, we believe that the upside on this front for most
companies is likely to be limited in the near- to medium-term. As such, we believe
that 25x is a suitable fair-value multiple.
Risks
We rate GSK Pharma Low Risk in view of the company's profitable and growing
business base in India. This is consistent with our quantitative risk-rating system.
Key upside risks that could impede the stock from achieving our target price
include: a) Faster than expected patented product launches - we expect five
launches over the next two years; b) Pick up in the Indian market growth rate
given GSK operates entirely in this market and is among the Top 3 companies in
the segment; and c) Any accretive acquisitions, given the sizeable cash balance
(c.US$300m+) on its books.