MOSL: GSK PHARMA (Neutral)-Muted sales and higher operating expense impact profitability

GSK Pharma: Muted sales and higher operating expense impact profitability

(GLXO IN, Mkt Cap USD3.2b, CMP INR1391, TP INR1374, 1% Downside, Neutral)

• GSK Pharma’s (GLXO) sales declined marginally by ~2% YoY to INR8.2b (our estimate: INR8.9b) in 2QFY19, partly due to a high base (channel re-filling in 2QFY18 post GST implementation). Gross margin improved ~230bp YoY (+30bp QoQ) to 57.2%. This is reflective of management’s strategy to rationalize its portfolio with an enhanced focus on higher-margin products. EBITDA margin, however, shrank ~270bp YoY to 20.2%, primarily due to higher other expenses (+400bp as % of sales). EBITDA declined ~14% YoY to INR1.7b (our estimate: INR1.9b). PAT was down ~23% YoY to INR1b due to EBITDA margin contraction and one-time non-operational expense of INR118m on account of restructuring. Adjusted for non-operational expense, PAT declined by ~10% YoY to INR1.1b (our estimate: INR1.3b). For 1HFY19, sales stood at INR15.5b (+8% YoY), EBITDA at INR3.1b (+44% YoY) and PAT at INR2.1b (+51% YoY).
• Top three products underperform: GLXO’s secondary sales grew by a muted ~1% in the quarter, as against 9.6% growth in the Indian Pharmaceutical Market (IPM). According to AIOCD, FDC-related market grew by 2% YoY. GLXO’s key products Augmentin, Synflorix and Calpol exhibited a decline in sales in 2QFY19. Of GLXO’s top three therapies (which contribute ~60% of overall sales), Derma registered highest growth of 7.6%, while Anti-infectives sales declined by ~4% YoY.