>GLAXOSMITHKLINE PHARMACEUTICAL (CITI)

Downgrade to Sell: Lacking Valuation Upside

■ Downgrade to Sell — This is purely a valuation call, with the stock now trading at 20x CY10E EPS. While we rate GSK as a good play on the stronger IPR regime in India, we expect any upside to be gradual over a number of years. In the interim, with an EPS CAGR of 15% (CY08-11E) and no near-term catalysts, we see a lack of upside over the next 6-12 months. We prefer Piramal Healthcare (1M) as a play on the Indian market.

■ Fully valued — Post a good run (up 9%/15% over 1/2 months, outperforming the BSE Sensex by 2%/8%), GSK appears fully valued at 23x CY09E and 20x CY10E EPS. While the P/E could expand as IPR benefits flow through to financials, we expect this to take a few years. Thus, while the stock could remain defensive with limited downside, we expect a lack of upside in the near-term.

■ Play on stronger IPR...— We expect GSK to be a key beneficiary of product patent introduction in India. Besides focusing on higher margin priority products, it has started launching patented and in-licensed products, and also intends to focus on branded generics. We expect these steps to drive sales growth to the industry level over the next two years and above industry rates beyond.

■ ...but still a long haul — GSK expects only seven patented/vaccine launches (including Tykerb) over CY08-10. With none of these likely to clock sales in excess of Rs400m by the third year, we expect a lag before any material step up in growth rate and profitability. Risks exist in the form of patent challenges, compulsory licensing, and possible government intervention in pricing.

■ Lowering estimates and target price — We lower CY10E/11E EPS estimates by 6%/2% on higher staff and marketing costs, and expect 15% EPS CAGR over CY08-11E. Our new target price of Rs1,360 is based on 20x Sept-2010E earnings.

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