Macquarie Research: buy Glenmark Pharmaceuticals: Target Rs 380

Glenmark Pharmaceuticals
Innovation play – a free option
Company Profile
 GNP is a leading player engaged in the discovery of new molecules (both
NCEs & NBEs) and global generics, with a focus in the therapeutic segments
viz Dermatology, Respiratory and Oncology across markets. Glenmark
Generics Ltd, a subsidiary of GNP, is an integrated generic and API focused
company with a presence in North America, EU and Latin America. The
formulations business includes products in the dermatology, modified release,
oral contraceptives oncology and control substances.
Business Fundamentals
 Innovation upside - a free option: Recent out-licensing of novel TRPV3 to
Sanofi (SNY) reinforces our confidence in GNP’s ability to discover and outlicense
promising lead compounds. GNP has generated ~US$150m in outlicensing
income from five deals with large partners in the past, and this is
unmatched by its peers. We believe progress of NCE products through clinics
and out-licensing will unlock value going forward.
 Niche opportunities in US – to drive earnings momentum: First-tofile/
niche products like Tarka (launched at risk), Dovonex (out-licensed to
Taro, 2QFY11 launch), Oxycodone (NDA filed with FDA, 4QFY11 launch) and
Malarone (litigation settled, 1HFY12 launch) are multi-year opportunities that
could help to build scale in the US business. We value the US generic
exclusivity pipeline at an NPV of Rs35/sh and estimate these niche
opportunities can boost recurring earnings by >25% over the next three years.
 Base business – profitable growth: The US generic business contributes
roughly 30% to the top line. The pipeline has a rich mix of oral contraceptives
(OC) and dermatology product filings, which, given the entry barrier, should
face limited competition and higher margins. GNP’s India business, given its
reach and diverse portfolio (contributing another 30% to the top line), is well
positioned to leverage the volume-driven growth. Buoyed by these two
markets, we forecast GNP’s base revenue to grow at a 3-year CAGR of 17%,
with earnings growing much faster (28% CAGR).
 Debt overhang receding: We believe earnings momentum should aid
healthy FCF generation of ~US$260m in the next three years, resulting in the
net debt/equity ratio falling to 0.5x by FY11E from 1.3x in FY09.
Key Triggers
 Niche launches in the US; out-licensing deals and positive Ph3 trial results for
Crofelemer (2HFY11) are potential catalysts for GNP.
Valuations & Recommendation
 Valuations are attractive, in our view, with GNP trading at a PER of 15x
FY12E earnings adjusted for exclusivity and NCE option value. We value
GNP at a TP of Rs380, at 17x FY12E core earnings (discount of 15% to the
sector) and add Rs35 and Rs25 as NPV for exclusivity opportunity and the
NCE pipeline, respectively.