Macquarie Research, :: Glenmark Pharmaceuticals- Innovation play! - A free option

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Glenmark Pharmaceuticals
Innovation play! - A free option
Event
 GNP, one of Macquarie Asia MarQuee Buy Ideas, is a leading player
engaged in the discovery of new molecules (both NCEs & NBEs) and global
generics, with a focus in the therapeutic segments – 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.

Impact
 Credible innovation infrastructure is available as a free option: Recent
Crofelemer Phase 3 data and out-licensing of novel TRPV3 to Sanofi (SNY)
reinforces our confidence in GNP’s ability to identify and discover promising
lead compounds. We value these two NCE assets at Rs40/sh and believe
progress of these through clinics and outlicensing of other NCE products in
the pipeline will unlock value going forward.
 Niche opportunities in US – to drive earnings momentum: While loss of
Tarka could be a setback, visibility exists on other niche products that are
multi-year opportunities and could drive significant sales growth in FY12.
If we take US sales ex-Tarka this quarter of US$40m as a base, just a few
key product-specific opportunities could help drive it to ~US$58m avg/qtr
in FY12. The ramp-up of US sales will be the key data point to watch. 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.
 Strong presence in Emerging Markets: India, Latam and SRM contribute
about 50% to the topline. GNP’s India business, given its reach and diverse
portfolio is well positioned to leverage the volume-driven growth. In Latam and
SRM, we expect the margins to expand as most of the businesses are
attaining critical mass.
 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 FY12E from 1.3x in FY09.
Action and recommendation
 Valuations are attractive, in our view, with GNP trading at a PER of 12x
FY12E earnings, adjusted for exclusivity and NCE value, despite 31% EPS
CAGR for FY11E–13E. We reiterate GNP as our top pick with a TP of Rs470.


Glenmark Pharmaceuticals Aide Memoire
Company
1. Is 30% growth in India sustainable? What would be the approximate margins in the India business?
2. Update on key products pipeline in US (Cutivate, Malarone)?
3. Market share updates on key products already launched (Felodipine, Dovonex & Oxycodone)
4. What is GNP strategy in SRM/Emerging markets? Expansion or focus on profitability?
5. Updates on Crofelemer Opportunity? Are there any other potential indications for the product?
6. What is the current Debt to equity ratio? Cost of debt?
7. Future capex plan?
8. Outlook for the API business from 1-2 years perspective?
9. Any acquisition plans in near future?
10. Update on the NCE/NBE pipeline?
11. What is the break-up of R&D expense between NCE & Generics business?
Industry
1. How attractive are the emerging markets (Russia, LATAM, South Africa etc) from a 3-5 years perspective? What would be
yours strategy going forward? How is the regulatory framework in each of these markets?
2. Is profitability/margins in Indian markets sustainable? How do you want yourself to position in Indian markets from a 3-5
years perspective? What will drive growth going forward?
3. What is the outlook on API business for Indian players from a timeframe of 2-3 years?