Glenmark: Firing from all cylinders -- Macquarie Research,

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GNP Pharmaceuticals
Firing from all cylinders
Event
 GNP reported 2Q FY11 sales of Rs7.2bn (up 23% YoY, 22% QoQ) and PAT
of Rs1.1bn (up 38% YoY, 39% QoQ).The EBITDA margin was 25.2%. If we
adjust for the forex gain of Rs120m, PAT was in line with our estimate of
Rs1bn. The key highlight to us was the marked improvement in the balance
sheet, which has in the past been a matter of concern for many investors. We
reiterate GNP as our conviction top pick with a revised TP of Rs440, implying
35% upside.
Impact
 Improved balance sheet: Receivable days were down to 119 (150 days
including securitized receivables) from 155 days (212 days including
securitized receivables) at the end of FY10. Net debt is currently Rs15.5bn,
down from Rs17.5bn at the end of FY10. GNP highlighted it was very
comfortable with current debt levels as based on its internal estimates; they
stand currently at around 1.25x FY12 EBITDA estimate. In our view, this is a
reflection of the strong FY12 based on the niche launches in US.
 Strong domestic growth: India’s formulation business contributed ~31% to
the top line and grew by 22% YoY. Secondary sales growth, according to
ORG-IMS data for 2Q FY11, was much stronger at ~29.4%, and we expect
the momentum to be reflected in primary sales in coming quarters.
 Niche launches in US to drive earnings momentum: US generics
contributed another ~31% to the top line and grew by 26% YoY. GNP
launched 6 products in 2Q with 6 more planned for 2H FY11. The pipeline has
a rich mix of oral contraceptives (OC, 3 launched, 13 pending approval) and
dermatology product filings, which, given the entry barrier, should face limited
competition. First-to-file/niche products like Tarka (launched at risk), Dovonex
(launched end 2Q FY11), Oxycodone (4QFY11) and Malarone (litigation
settled, 1H FY12 launch) are multi-year opportunities that will help to build
scale in the US business, the potential of which the street underappreciates.

 Semi regulated markets grew 10% YoY and contributed 12% to sales. While
secondary sales were strong, we have trimmed our FY11 growth to 12%.
Earnings and target price revision
 We are raising our one year forward TP to Rs440 from Rs380, driven largely
by rolling our TP forward 6 months to Sept ‘11, and assigning a higher
multiple 18x (prev. 17x) on account of increasing comfort with the balance
sheet.
Price catalyst
 12-month price target: Rs440.00 based on a Sum of Parts methodology.
 Catalyst: 1) Niche launches in the US. 2) Crofelemer Ph3 trial data (2H FY11).
Action and recommendation
 Valuations are attractive, in our view, with GNP trading at a PER of 14x
FY12E earnings, adjusted for exclusivity and NCE option value, despite 27%
earnings CAGR for FY11E–13E. Our reported EPS in FY12E/13E is Rs28/33,
36%/46% higher than street. We anticipate street earnings to upgrade.