Religare Research: Glenmark Pharmaceuticals- Hiccups in Para-IV but base business remains strong

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Glenmark Pharmaceuticals Ltd
Hiccups in Para-IV but base business remains strong
Glenmark Pharma (GNP) has lost initial part of the Tarka case. The final verdict
will take another 4-6 weeks. In worst case, NPV value of Tarka will get knocked
off fromourtaget price. The impact will be less than 2%. However, reported
earnings will fall by 7%/8%/6% in FY11e/12e/13e. No change in base business
earnings though. We remain positive GNP on the back of improving base
business. Any weakness in the stock price should be a buying opportunity.
Reiterate Buy.

Case Background:
Tarka (Trandolopril+Verapamil) is an anti-hypertensive drug of Sanofi/Abbott. It
had annual sales of USD 60 mn in US market. GNP had a Para-IV FTF on the
drug and launched the generic version “at-risk” in l June 2010 (last week).
The Verdict:
The US court announced ruling on some parts of the case today. The initial
verdict indicates that GNP will have to pay USD 16 mn penalty and obviously
stop selling the generic version. The current verdict is not binding, final verdict
will take 4-6 weeks.
Earnings Impact:
Our numbers consider generic Tarka sales of USD 16/18/15 mn and PAT of USD
11/13/11 mn in FY11e/12e/13e respectively. If GNP discontinues generic Tarka,
it will reduce reported earnings by 7/8/6% in FY11e/12e/13e. There will be no
impact on the base business earnings.
Impact on the Target Price:
We value limited period limited competition opportunities on NPV basis. We
have valued Tarka at Rs 5.1 per share. If we knock off NPV of Tarka, the target
price will be revised from Rs 415 to Rs 410 (less than 2%).
Valuations:
The stock is trading at a PER of 17.9x/13.8x FY12e/13e base business earnings.
We have valued GNP on a SOTP basis: a) base business at Rs 336 (15x Sept.’12
earnings – a significant discount to frontline pharmacos given the balance sheet
issues), b) the R&D deal with Sanofi at Rs 25 (probability adjusted NPV), c) the
Zetia deal at Rs 17 (NPV) and d) other limited competition opportunities at Rs 12
(NPV). We maintain our target price of Rs 415.