PINC POWER PICKS: GLENMARK: BUY, TP-Rs353 (14% upside)

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What’s the theme?
Glenmark has underperformed the BSE Healthcare Index on a disappointing NCE R&D pipeline and slowing
growth in the generic business. Thus, the stock is now available at cheaper valuations. We believe that as
growth comes back, Glenmark offers potential for a re-rating.
What will move the stock?
1) Growth in the US on approvals for niche products (dermatology, controlled substances, modified
releases, hormones); 2) Improved profitability in RoW markets, strong volume growth, and stable currencies;
3) News flow on the innovative research programme; and 4) Balance sheet improvement with reducing
leverage and working capital requirements.
Where are we stacked versus consensus?
Our estimates are among the highest on the Street because we are more sanguine about Glenmark's
return to high growth in the US (more niche product launches vs. an existing plain vanilla generic product
portfolio) and RoW markets (volume growth and stabilizing currencies). Given near-term uncertainty over
the NCE R&D pipeline and related milestones, we believe cost basis is more appropriate for valuing the
NCE R&D effort. We value the base business at 18x Sept'11E earnings after adding back NCE R&D (net
of tax shield). We also add Rs15/share as NPV for 'at risk' launch of Tarka in the US. This yields a TP of
Rs353. Maintain 'BUY'.
What will challenge our target price?
1) Inability to launch differentiated products in the US generic market, due to delays in securing approvals
from the US FDA; and 2) Inability to sustain growth in RoW markets.