Glaxo Smith Kline Pharmaceuticals Limited

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1 Glaxo Smith Kline Pharmaceuticals Limited BUY CMP: Rs Date: November 11, 2009 Key Ratios: Particulars CY08 (12 m) CY09E (12 m) CY10E (12 m) OPM (%) NPM (%) ROE (%) ROCE (%) P/BV(x) P/E(x) EV/EBDITA(x) Debt Equity ratio Key Data: Sector Pharma Face Value Rs wk. High/Low Rs / Volume (2 wk. Avg.) 3242 BSE Code V.S.R. Sastry Vice President Equity Research Desk Target Price: Rs Market Cap. : Rs mn. SYNOPSIS GSK Pharma is the largest pharma company in the domestic pharma market. It is a 51% subsidiary of the US$ 46bn Glaxo Group, the world's second-largest pharma company with an R&D warchest of US$ 6.8 bn. GSK Pharma's product portfolio boasts of some of the leading brands like Augmentin, Cobadex and Zevit in the domestic pharma market. It derives its revenues from pharmaceuticals and fine chemicals. The company has emerged as frontrunner for a phased buy-in to Dr Reddy`s Laboratories. The US Food and Drug Administration (USFDA) has announced that Cervarix from Glaxo Smith Kline (GSK) was effective in blocking the cervical cancer virus. The company is seeking a nod from the government to market its patented drug for treating the contagious H1N1 virus, popularly known as swine flu. The company is looking at launching its patented medicine promecta, used in treatment of depleted platelet count, in India. The company has introduced 3 vaccines and 2 pharmaceutical products in 9MCY09. Company has got very good response for Rotarix and Cervarix vaccine. The company s top line and bottom line is expected to grow at a CAGR of 11% and 15% over CY07 to CY10E. Share Holding Pattern: Dr. V.V.L.N. Sastry Ph.D. Chief Research Officer drsastry@firstcallindia.com Firstcall India Equity Advisors Pvt Ltd 1

2 Table of Content Content Page No. 1. Investment Highlights Peer Group Comparison Key Concerns Financials Charts & Graph Outlook and Conclusion Industry Overview 13 Firstcall India Equity Advisors Pvt Ltd 2

3 Investment Highlights Result Updates Q3 CY09 For the third quarter, the top line of the company increased 12%YoY and stood at Rs mn against Rs mn of the same period of the last year. The bottom line of the company for the quarter stood at Rs mn from Rs mn of the corresponding period of the previous year i.e., an increase of 7%YoY. EPS of the company for the quarter stood at Rs for equity share of Rs each. Firstcall India Equity Advisors Pvt Ltd 3

4 Expenditure for the quarter stood at Rs mn, which is around 12% higher than the corresponding period of the previous year. Raw material cost of the company for the quarter accounts for 20% of the sales of the company and stood at Rs mn. Employee cost stood at Rs mn accounts for 11% of the revenue of the company for the quarter. OPM and NPM for the quarter stood at 38% and 27% respectively from 40% and 28% respectively of the same period of the last year. Firstcall India Equity Advisors Pvt Ltd 4

5 GlaxoSmithKline eyes Dr Reddy`s Laboratories The company has emerged as frontrunner for a phased buy-in to Dr Reddy`s Laboratories. A transaction could spark a fresh wave of foreign deals in India`s drugs sector. While nothing is finalized, one possibility is that Glaxo will take a 20% stake in Dr Reddy`s Holdings, a family vehicle that in turn owns 23.2% of the drug maker. It is believed that this would give Glaxo a stake of just under 5%, worth around USD 165 million. But the British company could also get right of first refusal on the family`s remaining holding. GSK s Cervarix blocks cervical cancer virus; USFDA The US Food and Drug Administration (USFDA) has announced that Cervarix from Glaxo Smith Kline (GSK) was effective in blocking the cervical cancer virus. The vaccine blocked the Human Papilloma Virus (HPV) about 93% of the time with some minor side effects. The agency is going to consult a team of professionals to seek their opinion on whether to approve the vaccine for female consumers falling in the age group of years. If the company receives approval for Cervarix then it will end the two years wait of the British drug-maker to introduce this vaccine in American markets. The vaccine has already been approved in around 100 countries across the globe. GSK seeks government nod to introduce H1N1 drug in India The company is seeking a nod from the government to market its patented drug for treating the contagious H1N1 virus, popularly known as swine flu. The patented drug Relenza is already registered with the Indian authorities and will not require clearance from the Drug Controller General of India (DCGI). Presently, the retail sale of the swine flu drug, oseltamivir (Tamiflu) is not permitted in India. The drug can be sold through government hospitals as the treatment and diagnosis of the flu has been carried out by the government itself. The company is undecided whether to sell the drug through government hospitals or to opt for the retail route. GSK presently does not manufacture the drug in India but the company is supplying the drug to many countries across the globe and is also in the process of increasing its manufacturing capacity for the drug. Despite the swine flu toll touching 90, Indian health authorities have not yet placed any orders with domestic manufacturers Serum Institute, Firstcall India Equity Advisors Pvt Ltd 5

6 Panacea Biotec and Bharat Biotec which are developing the vaccine. (Cadila Pharma is also developing a vaccine in collaboration with US Company Novavax). GSK to launch `promecta` in India The company is looking at launching its patented medicine promecta, used in treatment of depleted platelet count, in India by this year-end or early next year. The company have applied for the regulatory approval but they haven`t got it yet. But the company hopes to get it by the end of this year of early next year. Extends strategic collaboration with Aspen GSK to acquire 16% shareholding in Aspen in exchange for transfer of specialist products and manufacturing facility in Bad Oldesloe, Germany. The company gets USFDA nod for Nicorette The company has received final approval from the US Food & Drug Administration (USFDA) to market Nicorette in the strengths of 2 mg and 4 mg. the drug would be available in Lozenge form. Lozenge is a hard tablet or molded shape containing drug in a sweetwened, flavored base. Recently, the company received final approval from the US Food & Drug Administration (USFDA) to market Lamictal Tablet in the strength of 25 mg, 50 mg, 100 mg and 200 mg. Lamictal is an anticonvulsant drug used in the treatment of epilepsy and bipolar disorder Receives USFDA nod for epilepsy drug The company has received final approval from the US Food & Drug Administration (USFDA) to market Lamictal Tablet in the strength of 25 mg, 50 mg, 100 mg and 200 mg. Lamictal is an anticonvulsant drug used in the treatment of epilepsy and bipolar disorder. For epilepsy it is used to treat partial seizures, primary and secondary tonic-clonic seizures, and seizures associated with Lennox-Gastaut syndrome. Firstcall India Equity Advisors Pvt Ltd 6

7 Peer Group Comparison Name of the company CMP(Rs.) (As on Nov 11,2009) Market Cap. (Rs. Mn.) EPS (Rs.) P/E (x) P/BV (x) Dividend (%) GSK Pharma Sun Pharma Cipla Dr.Reddys labs Key Concerns Forex Changes are affecting the margins. Margins are decreasing because of increasing operative expenses. High competition. Transformation of process patent to product patent. Firstcall India Equity Advisors Pvt Ltd 7

8 Financials Results Update 12 months ended Profit and Loss A/C (Standalone): Value(Rs in million) CY07A CY08A CY09E CY10E Description 12m 12m 12m 12m Net Sales Other Income Total Income Expenditure Operating Profit Interest Gross Profit Depreciation Profit before Tax Tax Profit after Tax Equity Capital Reserves Face Value Total No. of Shares EPS (Before Extraordinary Items) Firstcall India Equity Advisors Pvt Ltd 8

9 Quarterly ended Profit and Loss A/C (Standalone): Value(Rs. in million) 31-Mar Jun Sep Dec-09E Description 3m 3m 3m 3m Net Sales Other Income Total Income Expenditure Operating Profit Interest Gross Profit Depreciation Profit before Tax Tax Profit after Tax Equity Capital Face Value Total No. of Shares EPS (Before Extraordinary Items) Firstcall India Equity Advisors Pvt Ltd 9

10 Charts Net sales & PAT P/E Ratio (x) Firstcall India Equity Advisors Pvt Ltd 10

11 P/BV (X) EV/EBITDA(X) Firstcall India Equity Advisors Pvt Ltd 11

1 Year Comparative Graph GSK Pharma BSE SENSEX Outlook and Conclusion At the market price of Rs.1585.00, the stock is trading at 24.42 x and 22.25 x for CY09E and CY10E respectively.

12 1 Year Comparative Graph GSK Pharma BSE SENSEX Outlook and Conclusion At the market price of Rs , the stock is trading at x and x for CY09E and CY10E respectively. EPS of the company is expected to be at Rs and Rs for the earnings of CY09E and CY10E respectively. On the basis of EV/EBDITA, the stock trades at x and x for CY09E and CY10E respectively. The price to book value of the company is expected to be at 6.42 x and 4.98 x for CY09E and CY10E respectively. The company s top line and bottom line is expected to grow at a CAGR of 11% and 15% over CY07 to CY10E. The company has introduced 3 vaccines and 2 pharmaceutical products in 9MCY09. Company has got very good response for Rotarix and Cervarix vaccine. Firstcall India Equity Advisors Pvt Ltd 12

13 The company has emerged as frontrunner for a phased buy-in to Dr Reddy`s Laboratories. The US Food and Drug Administration (USFDA) has announced that Cervarix from Glaxo Smith Kline (GSK) was effective in blocking the cervical cancer virus. The company is seeking a nod from the government to market its patented drug for treating the contagious H1N1 virus, popularly known as swine flu. The company is looking at launching its patented medicine promecta, used in treatment of depleted platelet count, in India We recommend BUY for this stock with a target price of Rs for long term. Industry Overview The Indian pharmaceutical industry is driving product development and breaking new grounds in medicine research worldwide. The Indian domestic pharmaceutical market was estimated to be US$ billion in 2008 and is expected to grow at a high compound annual growth rate (CAGR) of 9.9 per cent till 2010 and thereafter at a CAGR of 9.5 per cent till Currently, the Indian pharmaceutical industry is one of the world's largest and most developed, ranking 4th in volume terms and 13th in value terms. The country accounted for 8 per cent of global production and 2 per cent of world markets in pharmaceuticals in The Indian pharmaceutical off shoring industry is slated to become a US$ 2.5 billion opportunity by 2012, thanks to lower R&D costs and a high-talent pool in India. Exports India exported drugs worth US$ 4.15 billion in Between April to December 2008, India exported pharmaceutical products worth US$ 3.77 billion. A report by industry research firm, RNCOS forecasts that pharmaceutical exports will grow at a CAGR of 18.5 per cent between and This growth will be fuelled by multi-billion dollar patent expirations and growth in the global generics market. Growth India's pharmaceuticals market is expected to grow by about per cent in 2009, says a study by consulting firm IMS. Firstcall India Equity Advisors Pvt Ltd 13

14 The domestic pharma retail market posted a healthy growth of 10 per cent in May over the previous month. On a moving annual total basis (April 2008 to May 2009), the organized pharma retail market grew by 10.4 per cent to US$ 7.40 billion, which was slightly higher than the previous month's value of US$ 7.32 billion, according to consulting company, ORG-IMS. A recent study by Yes Bank estimates the domestic formulations market to touch US$ 21.5 billion by The Indian vaccine market was worth US$ 665 million in and is growing at over 20 per cent. Exports contribute over US$ 360 million, while the domestic market for vaccines is US$ 300 million. Rural Market According to estimates rural areas account for 21 per cent of the country's pharmaceuticals market. In , the rural Indian pharmaceuticals market was estimated at around US$ 1.4 billion, having grown at about 40 per cent in against 21 per cent in the previous year. Elder Pharmaceuticals has earmarked US$ 8.21 million investment for a rural thrust and set up a dedicated division called 'Elvista' to spread its network to villages, towns, sub-urban/periphery markets and hinterland districts. Pharmaceutical Retail India has 5.5 million chemists and druggists, and the organized retail market accounts for just 2 per cent of the industry but is posting a year-on-year growth of per cent. The country's pharmaceutical retail market is expected to cross the US$ 10 billion mark in 2010 and be worth an estimated US$ 12 billion- US$ 13 billion by Generics According to a report by IMS Health, the Indian generic manufacturers will grow to more than US$ 70 billion as drugs worth approximately US$ 20 billion in annual sales faced patent expiry in With nearly US$ 80 billion worth of patent-protected drugs to go off patent by 2012, Indian generic manufacturers are positioning themselves to offer generic versions of these drugs. Indian drug maker Dr Reddy's Laboratories has partnered with GlaxoSmithKline to develop and market generics and formulations in emerging markets abroad. Diagnostics Outsourcing/Clinical Trials The Indian diagnostics and pathology laboratory business is presently around US$ 864 million and is growing at a rate of 20 per cent annually. Firstcall India Equity Advisors Pvt Ltd 14

15 Moreover, the US$ 200-million Indian clinical research outsourcing market will reach up to US$ 600 million by 2010, according to a joint study done by KPMG and the Confederation of Indian Industry (CII) in September Research & Development The search for innovative drug molecules and better technologies by pharmaceutical MNCs is expected to offer a windfall for the smaller research-oriented Indian firms. MNCs, whose drug pipelines are drying up and more blockbuster drugs going off-patent, are looking for alliances for drug co-development, buying or licensing out innovative molecules which can further be developed into finished drugs. Smaller Indian firms such as Indus Biotech and Rubicon Research are set to sign multiple deals with MNCs for molecules as well as technology out-licensing. Moreover, in a bid to boost R&D in the pharmaceutical sector, the government will provide US$ million for establishing six National Institutes of Pharmaceutical Education and Research over the next five years. Biotechnology major, Biocon, will be investing US$ million in the next fiscal in enhancing its R&D. Government Initiative The Government has taken various policy initiatives for the pharmaceutical sector Government has offered tax-breaks to the pharmaceutical sector. Units are eligible for weighted tax deduction at 150 per cent for the R&D expenditure incurred. Steps have been taken to streamline procedures covering development of new drug molecules, clinical research etc. Government has launched two new schemes New Millennium Indian Technology Leadership Initiative and the Drugs and Pharmaceuticals Research Programme especially targeted at drugs and pharmaceutical research. In a bid to promote new drug research in the country, the government is mulling creating special purpose vehicles (SPV) with insurance cover which will be used to fund new drug research. The Department of Pharmaceuticals is also toying with the idea of creating drug research facilities and centers that can be used by private companies for such research work on a pay-and-use basis. Investment According to Ministry of Commerce, domestic investment in the pharmaceutical sector is estimated at US$ 6.31 billion. Firstcall India Equity Advisors Pvt Ltd 15

16 The drugs and pharmaceuticals sector has attracted FDI worth US$ 1.43 billion from April 2000 to December Road Ahead The Indian pharmaceutical industry will see tremendous growth in the coming years as consumer spending on healthcare is increasing in India. Consumer spending on healthcare is expected to increase from 7 per cent of GDP in 2007 to 13 per cent of GDP by Disclaimer: This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable but we do not represent that it is accurate or complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it s affiliates shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provide for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Firstcall India Equity Advisors Pvt Ltd 16

17 Firstcall India Equity Research: B. Harikrishna Banking B. Prathap IT A. Rajesh Babu FMCG C.V.S.L.Kameswari Pharma U. Janaki Rao Capital Goods E. Swethalatha Oil & Gas D. Ashakirankumar Automobile Rachna Twari Diversified Kavita Singh Diversified Nimesh Gada Diversified Priya Shetty Diversified Tarang Pawar Diversified Neelam Dubey Diversified Firstcall India also provides Firstcall India Equity Advisors Pvt.Ltd focuses on, IPO s, QIP s, F.P.O s, Takeover Offers, Offer for Sale and Buy Back Offerings. Corporate Finance Offerings include Foreign Currency Loan Syndications, Placement of Equity / Debt with multilateral organizations, Short Term Funds Management Debt & Equity, Working Capital Limits, Equity & Debt Syndications and Structured Deals. Corporate Advisory Offerings include Mergers & Acquisitions (domestic and cross-border), divestitures, spin-offs, valuation of business, corporate restructuring-capital and Debt, Turnkey Corporate Revival Planning & Execution, Project Financing, Venture capital, Private Equity and Financial Joint Ventures Firstcall India also provides Financial Advisory services with respect to raising of capital through FCCBs, GDRs, ADRs and listing of the same on International Stock Exchanges namely AIMs, Luxembourg, Singapore Stock Exchanges and other international stock exchanges. For Further Details Contact: 3rd Floor, Sankalp, The Bureau, Dr.R.C.Marg, Chembur, Mumbai Tel. : / / Telefax : info@firstcallindiaequity.com Firstcall India Equity Advisors Pvt Ltd 17

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