GSK Pharma
Rating: Sell
GSK India’s improving revenue performance in Q3CY14 following six consecutive quarters of negative growth has rekindled investor interest in the stock, driving the stock price up (+8.5% since Nov’14 and -42% YTD (year-to-date) vs. BSE Healthcare). However, our analysis gives us little cause to upgrade our numbers at this moment. In our assessment, the impact of NLEM (national list of essential medicines)-led price cuts and currency will continue to weigh on profitability.
While we do build in market share gains in several of GSK’s key brands/therapies following the price cuts, we expect a flat margin profile for CY15 and margin improvement of 4pps (percentage points) over CY16-17, which is still 12pps below its historical highs.
Moreover, in our assessment, there is now little incentive for GSK Plc (UK) to pass on higher margins on its new patented launches to GSK India. We also expect growth of its key vaccine portfolio to slowdown in the near term in the absence of new launches. Accordingly we cut our EPS (earnings per share) estimates for CY14/15 by 4%/11% and introduce our CY16 numbers; we revise our FV (face value) to R2,400 (vs. R1,826 previously) as we roll our valuation to Dec’15. Reiterate Sell.
Assessing the competitive edge: GSK India has lost its pole position as a pure play on the fragmented Indian pharma, having gradually lost market share over the last four years as competitors have demonstrated agility and execution prowess to re-align their focus on high growth therapies. GSK India’s focus on acute therapies and concentrated product mix proved to be a strategy mis-step. While the INR depreciation over the last three years is proving to be stressful, given that GSK is a net importer, the NLEM-led price cuts in 2013 was a bigger blow, severely diluting its premium pricing and virtual model.
Volume surge is heartening, but is it enough? Over the last six months, GSK has been able to re-align its resources and has benefitted from the natural market share gains post the price cuts. But volume gains are not broad-based and are restricted to select brand categories in the acute segment like Augmentin, Banocide, Betnelan and Calpol, where absolute volumes increased in the range of 20-50%.
Will vaccines fire growth? Vaccines had contributed 30% to GSK India’s absolute growth over 2008-13, aided by new launches (Synflorix, Rotarix, Cervarix) which accounted for a half of segment growth. With Synflorix now nearing R1,200m+ sales, we see base effect weighing in and market pressures on products like Rotarix hurting growth. Apart from MenHibRix and NimenRix, we believe GSK’s vaccine pipeline offers little visibility.
By Espirito Santo Securities
