Glaxo Smith Kline Pharmaceuticals Limited

Firstcall India Equity Advisors Pvt Ltd 1

Glaxo Smith Kline Pharmaceuticals Limited

BUY Target Price: Rs.1790.00

CMP: Rs.1585.00 Market Cap. : Rs.134249.50mn.

Date: November 11, 2009

Key Ratios:

Particulars CY08

(12 m)

CY09E

(12 m)

CY10E

(12 m)

OPM (%) 37 40 40

NPM (%) 27 28 28

ROE (%) 29 26 22

ROCE (%) 39 37 31

P/BV(x) 8.71 6.42 4.98

P/E(x) 29.94 24.42 22.25

EV/EBDITA(x) 21.44 19.10 19.37

Debt Equity ratio 0.37 0.28 0.23

Key Data:

Sector Pharma

Face Value Rs.10.00

52 wk. High/Low Rs. 1636.00/1035.00

Volume (2 wk. Avg.) 3242

BSE Code 500660

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:

V.S.R. Sastry

Vice President

Equity Research Desk

91-22-25276077

[email protected]

Dr. V.V.L.N. Sastry Ph.D.

Chief Research Officer

[email protected]


Table of Content

Content Page No.

1. Investment Highlights 03

2. Peer Group Comparison 07

3. Key Concerns 07

4. Financials 08

5. Charts & Graph 10

6. Outlook and Conclusion 12

7. Industry Overview 13


Investment Highlights

• Result Updates Q3 CY09

For the third quarter, the top line of the company increased 12%YoY and stood at

Rs.5182.80mn against Rs.4637.10mn of the same period of the last year. The bottom line

of the company for the quarter stood at Rs.1410.80mn from Rs.1319.70mn 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.16.66 for equity share of Rs.10.00 each.


Expenditure for the quarter stood at Rs.3229.90mn, 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.1050.70mn.

Employee cost stood at Rs.561.60mn 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.


• 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 10-25 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,


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.


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 1585.00 134249.50 72.86 21.84 8.75 400.00

Sun Pharma 1437.35 297698.70 48.57 29.59 5.78 275.00

Cipla 304.75 244690.30 12.38 24.62 5.63 100.00

Dr.Reddys labs 1127.75 190302.50 40.55 27.81 3.62 125.00

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.


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 15771.40 16806.80 19802.21 21782.43

Other Income 898.40 282.60 532.10 585.31

Total Income 16669.80 17089.40 20334.31 22367.74

Expenditure -10396.40 -10827.20 -12460.20 -13706.22

Operating Profit 6273.40 6262.20 7874.12 8661.53

Interest - 700.20 547.54 574.92

Gross Profit 6273.40 6962.40 8421.66 9236.44

Depreciation -161.60 -163.40 -159.29 -167.26

Profit before Tax 6111.80 6799.00 8262.36 9069.19

Tax -2114.60 -2315.40 -2764.34 -3034.28

Profit after Tax 3997.20 4483.60 5498.02 6034.90

Equity Capital 847.00 847.00 847.00 847.00

Reserves 12762.10 14563.90 20061.92 26096.82

Face Value 10.00 10.00 10.00 10.00

Total No. of Shares 84.70 84.70 84.70 84.70

EPS

(Before Extraordinary

Items) 47.19 52.94 64.91 71.25


Quarterly ended Profit and Loss A/C (Standalone):

Value(Rs. in million) 31-Mar-09 30-Jun-09 30-Sep-09 31-Dec-09E

Description 3m 3m 3m 3m

Net Sales 4609.80 4619.50 5182.80 5390.11

Other Income 262.10 180.00 90.00

Total Income 4871.90 4799.50 5182.80 5480.11

Expenditure -2926.10 -2945.10 -3229.90 -3359.10

Operating Profit 1945.80 1854.40 1952.90 2121.02

Interest - 193.90 168.40 185.24

Gross Profit 1945.80 2048.30 2121.30 2306.26

Depreciation -36.70 -39.60 -39.90 -43.09

Profit before Tax 1909.10 2008.70 2081.40 2263.16

Tax -654.80 -692.10 -670.60 -746.84

Profit after Tax 1254.30 1316.60 1410.80 1516.32

Equity Capital 847.00 847.00 847.00 847.00

Face Value 10.00 10.00 10.00 10.00

Total No. of Shares 84.70 84.70 84.70 84.70

EPS

(Before Extraordinary

Items) 14.81 15.54 16.66 17.90


Charts

• Net sales & PAT

• P/E Ratio (x)


• P/BV (X)

• EV/EBITDA(X)


1 Year Comparative Graph

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.

• EPS of the company is expected to be at Rs.64.91 and Rs.71.25 for the earnings of CY09E and

CY10E respectively.

• On the basis of EV/EBDITA, the stock trades at 19.10 x and 19.37 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.

GSK Pharma BSE SENSEX


• 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.1790.00 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$ 10.76 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 2015.

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 2008. 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 2007-08. 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 2007-08 and 2011-12. 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 12-13 per cent in 2009, says a study

by consulting firm IMS.


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 2015. The Indian vaccine market was worth US$ 665 million in 2007-08 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 2006-07, the rural Indian pharmaceuticals market was estimated at around US$ 1.4

billion, having grown at about 40 per cent in 2006-07 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 30-40 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 2012.

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

2008. 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.


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 2008.

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$

422.96 million for establishing six National Institutes of Pharmaceutical Education and Research

over the next five years. Biotechnology major, Biocon, will be investing US$ 20.11 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.


• The drugs and pharmaceuticals sector has attracted FDI worth US$ 1.43 billion from April

2000 to December 2008.

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 2015.

____________________________________________________________

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 Research: Email – [email protected]

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