MOSL: GSK PHARMA (Neutral)-Loss of Zinetac sales leads weak earnings
GSK Pharma: Loss of Zinetac sales leads weak earnings
(GLXO IN, Mkt Cap USD3.4b, CMP INR1447, TP INR1490, 3% Upside, Neutral)
Focus on key brands/new launches to drive growth
- GSK Pharma (GLXO) was able to improve profitability over FY17-9MFY20, led by product rationalization/enhanced focus on high-margin products. However, its decision to stop selling 'Zinetac' brand (~6% of sales) should have an adverse impact on near-term growth. We expect 8-9% sales CAGR over the next 2 years after adjusting for the loss of 'Zinetac' sales.
- We reduce our EPS estimates by 12.8%/1.7%/1.3% and reduce P/E multiple to 41x (from 43x earlier) to factor in the (a) voluntary stoppage of 'Zinetac', and (b) gradual industry-wide slowdown in the anti-infective category with improved hygienic conditions/lower intensity of epidemics.
Miss due to lower revenue growth/ higher employee cost
- Revenue declined 6% YoY to INR7.8b (v/s est. INR8.3b) in 3QFY20. Adj. for the voluntary recall of ranitidine products and portfolio-optimization initiative, revenue was up 6% YoY.
- Gross margin (GM) expanded 430bp YoY (+20bp QoQ) to 57.9%, led by the change in product mix. EBITDA margin dropped ~60bp YoY to 16% on higher employee cost (+620bp YoY), offsetting the benefit of better GM/lower other expenditure (-130bp YoY). EBITDA declined 9.3% YoY to INR1.2b (v/s est. INR1.8b).
- PAT was up 9.3% YoY at INR927m (v/s est. INR1.4b) on account of the lower tax rate (22.4% in 3QFY20 v/s 40.1% in 3QFY19).
- A one-time financial impact of INR7.5b in 3QFY20 was due to (a) INR6.4b financial impairment related to the under-utilization of manufacturing facilities, (b) INR970m impairment of other assets/costs, and (c) INR170m due to an outstanding litigation matter. Thus, the reported loss of INR6.6b.
GlaxoSmithKline Pharmaceuticals Limited is a pharmaceutical company. The Company and its subsidiary are engaged in the business of manufacturing, distributing and trading in pharmaceuticals. The Company develops a range of products in approximately three areas, including pharmaceuticals, vaccines and consumer healthcare. The Company's product portfolio includes prescription medicines and vaccines. The Company's prescription medicines range across therapeutic areas, and it also offers a range of vaccines for prevention of life-threatening diseases, such as pneumococcal disease, meningitis, hepatitis, rotavirus, whooping cough, small pox and influenza. It provides healthcare solutions to patients, with a range of prescription medicines across areas covering anti-infectives, dermatology, gynecology, diabetes, oncology, cardiovascular disease and respiratory diseases. The Company's manufacturing unit is located at Nashik, and its clinical development center is located in Bangalore.
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