New launches to prop sales recovery as GSK Pharma gets over Zinetac pain

Near-term gains may be limited given restrictions which will impact anti-infectives portfolio

The GlaxoSmithKline Pharmaceuticals (GSK Pharma) stock has underperformed the overall pharma market over the last one year on account of lower sales in the anti-infectives category.

The company recently sold its Vemgal plant in Karnataka to Hetero Labs for Rs 180 crore. The plant had remained unutilised after the company took a decision to discontinue production of heartburn drug Zinetac. The company took a Rs 640 crore write-off last year and was looking at a buyer for the plant.

Given that the book value of the assets stood at Rs 375 crore, the company will take a Rs 195 crore loss post the transaction. Analysts at ICICI Securities believe that with an underutilised asset out of the way and no immediate capex requirement, the return ratios should improve. They also expect the company to announce a higher dividend in FY22 given the expected free cash flows of Rs 540 crore in FY21 and the Rs 180 crore from the sale transaction.

While this puts the Zinetac overhang behind it, the street will keep an eye out for sales growth going ahead. The company returned to the growth trajectory in the December quarter posting a 10 per cent improvement over the year ago quarter on the back of market share gains of key brands. The company indicated that vaccines and respiratory products are important growth areas which are expected to grow in double digits.

In addition to growth of the key brands, the company is banking on new product launches from its vaccines/asthma portfolio and these include Fluarix Tetra, Menveo, and Nucala. While new launches should help, the rerating of the stock will depend on momentum for its anti-infective portfolio. This could get delayed given the ongoing lockdowns and restrictions across multiple states.

Unlike its generic peers, the company’s focus on domestic formulations, a healthy balance sheet with cash of Rs 1,000 crore and improving return ratios are positive. At current levels, the stock is trading at 36 times FY23 earnings estimates which is at a discount to its historic multiples. Investors, however, should await consistent gains on the sales growth and margin fronts in the near term before considering the stock.