Citi -- Glenmark:Recovery Underway

Visit http://indiaer.blogspot.com/ for complete details �� ��


Recovery Underway
 Business Snapshot -- Glenmark is a fully integrated research-based pharma
company, with a business model spanning drug discovery research, APIs
and formulations. It has eight molecules in various stages of clinical
development & is primarily focused on the areas of Inflammation
[asthma/COPD, rheumatoid arthritis etc.] and Pain [neuropathic pain and
inflammatory pain]. It has stuck four NCE licensing deals with global pharma
companies, of which one is live currently. Besides, it has generics
operations in over 65 countries, including the regulated markets of the US
and Europe & several emerging markets. Around 60% of its topline comes
from overseas markets.


 Latest Quarterly Performance – 2Q was good on almost all fronts and growth
appears back on track in most key markets & debtor days declined further.
Although margins disappointed (currency & higher R&D), we believe the biz
has turned the corner. Topline growth (+23%) was healthy on good traction
in key markets: India (+22%), US (+26%), LatAm (+23%). The US, in
particular, gained good traction following the “at risk” launch of Tarka
(cUS4-5m revenues). Balance sheet also improved with healthy declines in
working capital days & net D/E.

 Key Catalysts / Issues – a) Traction in the US generics business, following
several niche launches in the last couple of quarters – especially on Tarka
(at risk launch) & Calcipotriene (derma product licensed to Taro); b) Ability
to sustain the recovery seen in emerging markets in the current fiscal; c)
Working capital – will receivables (including securitized) days continue to
trend down?; d) Progress on Crofelemer – likely NDA filing in 1QCY11; e)
R&D – Milestone payments from the GRC-15300 licensing deal with Sanofi
or fresh licensing deals for any of the other molecules in its R&D pipeline.

 Crofelemer: a Good Opportunity-- The positive outcome of the Crofelemer
(inlicensed from Napo Pharma) Ph-III trial is a step forward in Glenmark’s
efforts at bringing a proprietary drug to market (likely in CY12). The
opportunity is three-fold: a) a 10 year manufacturing and supply agreement
for Crofelemer API with Salix; b) royalties from Napo on sales in the western
markets c) marketing rights for 80 countries – all emerging markets – launch
likely in CY12 & potential peak annual sales of US$80m. We ascribe a value
of Rs18/sh to Crofelemer (50% probability of launch).

 Valuations: Room to Re-rate if Current Trends Sustain – Glenmark used to
trade at premium valuations before de-rating materially due to
disappointments on R&D & the core biz. At 19xFY12E core biz EPS, the
stock is reasonably valued & does not appear to build in any value for its
R&D pipeline. We believe there is scope for further re-rating if the recent
positive trends on the base biz (especially on the B/S front) sustain. Its
innovative R&D pipeline & potential upside from Crofelemer should also
provide support to valuations.