GSK Pharmaceuticals - Field force expansion hits margins :: Macquarie Research,

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GSK Pharmaceuticals
Field force expansion hits margins
Event
 2Q CY11 results below our estimates: GSK reported 2Q CY11 results, with
net sales of Rs5.6bn (up 12.8% YoY) and adjusted PAT of Rs1.5bn (up 8.6%
YoY) below our estimates. The EBITDA margin declined by 290bps to 34.7%
(vs our estimate of 35.5%) due to higher employee costs from field force
expansion. We maintain our Neutral rating and TP of Rs2,210.
Impact
 Field force expansion hits margins: Net sales grew by 12.8% YoY to
Rs5.6bn and PAT grew by 8.6% YoY to Rs1.5bn. Sales of the core
pharmaceuticals and vaccine business grew by 14%. GSK grew in line with
the industry in the quarter. The EBITDA margin declined by 290bps to 34.7%
due to higher employee costs from field force expansion. GSK continued its
planned investments in field force expansion for the year.
 Vaccines, mass specialty and dermatologicals leading the way:
Vaccines, mass specialty and dermatologicals businesses registered strong
growth, driven by the launch of branded generics, increasing the extension of
rural coverage and focused efforts in the hospital segment. Despite the base
effect, vaccines have shown strong market competitive growth. Vaccines
currently contribute ~13% of the top line. GSK launched a branded generic
and a product through Stiefel – dermatology products – during the quarter.
GSK has a broad product basket covering ~90% of the Indian derma market
(~50% before the Stiefel acquisition). GSK also launched two original
products from the GSK pipeline in oncology and haematology.
 Leeway to pursue strategic alternatives: With ~Rs18.5bn in net cash and a
negative WC, GSK has one of the strongest balance sheets in the sector. This
provides much requisite leeway to pursue strategic alternatives. The company
remains open to acquisitions of assets at a reasonable valuation that would
help strengthen its India formulation business.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs2,210.00 based on a PER methodology.
 Catalyst: Value-accretive acquisitions.
Action and recommendation
 We value GSK at a PER of 23x CY12E, a 20% premium to the sector average
PER, given the stable nature of GSK's earnings profile, its high-return ratios,
free cash-flow generation and healthy dividend yield support.
 Although we believe in the long-term fundamentals of GSK, the current price
leaves little valuation buffer, in our view. We recommend adding to positions
on weakness and maintain our Neutral rating with a target price of Rs2,210.