25 Feb 2013

Update |Sector: Healthcare

GSK Pharma

CMP: INR2097

TP: INR 2542

BUY

Analyst meet takeaways – Double digit topline growth expected;

Pricing policy impact not yet assessed; Aggressive new launches

in CY13‐14

(GLXO IN, Mkt Cap USD3.3b, CMP INR2097, TP INR2542, 21% Upside, Buy)

We attended the annual analyst meet of GSK Pharma. Key highlights:

‐

Pharma revenue growth guidance in line with industry: GSK Pharma’s

management has guided for Pharma sales growth at 12‐14% in line with

industry, led by new launches and growth in existing products (not considering

the adverse impact on New Pharma Pricing Policy). The management has

indicated that, it would sustain the past profitability if the NPPP is not

implemented.

‐

The management has not assessed the impact of the policy as it is waiting

further details from the Government over its implementation. However, they

confirmed that the company will be able to take price increases on the DPCO

drugs (currently constitute ~23% of sales).

‐

Focus on priority products to lead growth: GSK Pharma’s topline growth over

the next two years will be led by focus on Priority Products (including vaccines &

patented products) which are likely to sustain double‐digit growth. This will be

driven by expanding therapeutic and geographic coverage coupled with

incremental contribution from new launches.

‐

Aggressive new launches ahead: The company plans to launch several products

in CY13‐14 including CNS portfolio, one oncology (in‐licensed from Amgen), one

respiratory product, 2‐3 dermatology products and couple of vaccines. While we

view this as a long‐term positive, we believe that a meaningful contribution

from these products to GSK’s overall revenues is still some years away. New

launches (products launched in last three years) accounted for 6% of GSK’s CY12

pharma revenues.

‐

Inorganic expansion: The management indicated that it may pursue inorganic

opportunities after 2‐3 years to compensate for any slowdown in growth. Cash

on books is ~INR20b as on December 2012.

Valuation & 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 is likely to sustain double‐digit topline growth over the next few

years. We believe that this growth trajectory will improve further post CY13/14,

as new launches start contributing meaningfully to 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 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‐

50%.

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GSK Pharma

‐

‐

Our estimates exclude potential adverse impact of proposed New Pharma

Pricing Policy pending implementation. However, we believe that the policy will

adversely impact MNCs like GLXO and hence we expect a downgrade in our

estimates post the implementation of the policy. However, from a medium‐to‐

long term perspective, any decline in stock price due to the NPPP should be

utilized as a buying opportunity.

Based on our estimates, the stock is valued at 22.9x CY13E and 20.6x CY14E our

earnings estimates. We maintain Buy with a target price of INR2542 (25x

CY14E), 21% upside.

CY12 business update

-

CY12 net sales grew 11.2% YoY to INR26b while Adj PAT grew 7.3% YoY to

Rs6.77b. Pharmaceutical sales (95.4% of revenues) grew by 12.5% while Iodex

sales (4.3% of revenues) grew by 3.5%. Exports (0.8% of revenues) de‐grew

46.3% due to lower Betamethasone exports.

-

Pharma growth was led by better performance across most of the product

segments. Vaccines business (13% of pharmaceutical sales) reported 34%

growth on a high base, Specialty products grew by 16%+, Mass‐specialty by 10%

and mass‐market portfolio 7%.

-

EBITDA grew 6% YoY to INR7.88b while EBITDA margins contracted 150bps

YoY to 30.3%. EBITDA growth was lower than topline growth mainly due to the

46% de‐growth in exports and increased material cost due to adverse currency.

-

The MR strength was maintained at 3500. The company plans no significant

addition to the field force in CY13.

-

Cash on books is ~INR20.39b and the company has recommended a dividend of

INR50/share for CY12 v/s INR45/share for CY11.

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GSK Pharma

Guidance (excl. impact of NPPP‐12):

-

Revenue growth:

Management has given Pharma revenue growth guidance at

12‐14% in line with industry for CY13. We estimate revenue growth of

13%/13.5% for CY13E/CY14E. Overall topline growth will be aided by new

launches over the next two years.

-

EBITDA margins:

GLAXO expects to maintain current profitability with EBITDA

margins above 30% for the next two years. This could impacted by (1) strong

depreciation of the INR against the USD and (2) implementation of the pricing

policy.

Inorganic expansion: The management indicated that it may pursue inorganic

opportunities after 2‐3 years to compensate for any slowdown in growth. Cash

on books is ~INR20.39b as 31st December 2012.

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GSK Pharma

Aggressive new launches

-

In line with its strategy, GSK is gradually ramping up its presence in the high‐

growth lifestyle segments. It entered the CNS segment in CY12 by launching the

anti‐epileptic drugs Lamictal and Ictacetam (branded generic).

-

Management has become more aggressive as far as new launches are

concerned and has commenced launch of branded generics (products belonging

to other MNCs but not enjoying any patent protection in India) to fill in the gaps

in its lifestyle portfolio. GSK has indicated that its new launches –

Votrient, Revolade and Synflorix – are performing very well.

-

The company plans to launch several new products in CY13‐14 including

parent’s patented products, and branded generics. Apart from launch of CNS

portfolio, it expects to launch 2‐3 products in dermatology, one product in

respiratory, one product in oncology segment (in‐licensed from Amgen) and

couple of vaccines.

-

While we view this as a long‐term positive, we believe that a meaningful

contribution from these products to GSK’s overall revenues is still some years

away. New launches (products launched in last three years) accounted for 6% of

GSK’s CY12 pharma revenues and 30% of the growth.

National Pharma Pricing Policy likely to impact earnings, no assessment shared

-

The New Pharma Pricing Policy (NPP) was announced in December 2011 with

the key recommendations being: (1) Cap prices of all the 348 NLEM drugs and

their combinations to the simple average of all brands with more than 1%

market share; (2) Automatic annual price adjustment (up or down) linked to WPI

for NLEM products while maximum 10% annual increase allowed for Non‐NLEM

drugs (3) Price of existing DPCO drugs will be allowed to increase by a maximum

of 10% after a one year freeze.

-

Among Indian players, GLXO will be among the worst impacted (in the short‐

term) on account of its premium pricing policy and high coverage of ~35% to the

NLEM. The company also garners ~17% of sales from the anti‐infective segment

which accounts for 17% of the NLEM.

-

The management has not assessed the impact of the policy as it is waiting

further details from the Government over its implementation. However, they

confirmed that the company will be able to take price increases on the DPCO

drugs (currently constitute ~23% of sales).

-

As per preliminary assessment by AIOCD and IMS Health, the impact on GLXO’s

sales could be in the range of 6‐9%, and we estimate CY13/14 EPS impact of 15‐

25%. These assessments do not take into account: (1) the partial impact that will

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GSK Pharma

-

be shared by trade/retail channels through lower margins, and (2) possibility of

deregulation of price controls on DPCO drugs which constitute 25% of GLXO’s

current sales.

GLXO’s management has not confirmed the above assessment of the policy

impact. As such, we currently have not built in the impact of the policy’s

implementation.

Key risks

-

We believe that the biggest risk to GSK Pharma would be the implementation of

the NPPP in the current form. The new policy proposes to significantly increase

the span of control by bringing in additional 348 drugs under price control. This

could severely impact the profitability of GSK Pharma’s business.

-

Possible pre‐grant and post‐grant patent challenges by domestic generic

companies could hamper the plans and prospects of launch of patented product

by GSK Pharma in India. Since, the revenue growth for GSK Pharma in the future

is partially dependent on the launch of patented products from GSK Plc’s (Parent

company) stable, any delay in grant in patent or patent related litigation in India

could risk the double digit revenue growth.

Any regulation that results in downward pressure on patented drug prices will

be deterrent to future growth plans, since launching patented products from

its parent’s pipeline is integral to GLAXO’s future growth strategy. We do not

expect this to be implemented in the near future.

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GSK Pharma

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GSK Pharma

No

No

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