JPMorgan: Glenmark Pharmaceuticals - Generics Growth Potential and NCE Pipeline Underappreciated: Initiate with Overweight

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Glenmark Pharmaceuticals Ltd.
Initiation
Overweight
GLEN.NS, GNP IN
Generics Growth Potential and NCE Pipeline
Underappreciated: Initiate with Overweight


 Integrated generics play with global presence: Initiate coverage with
Overweight and Mar-12 PT of Rs400. GNP’s core business is benefiting from
1) rising healthcare spends in emerging markets and 2) cost reduction measures
in developed markets driving adoption of generics as innovator drugs go offpatent.
GNP is gaining market share in India, has a formidable presence in the
US and is building a substantial presence in other markets. Currently, GNP is
represented in 80 countries. We expect GNP’s core generic business earnings to
grow at 21% CAGR over FY11-FY14E and we value it at Rs352/share based
on 18xFY13E P/E
 First to file opportunities enhance US positioning: GNP is increasingly
settling FTF litigations with patent holders, thereby reducing risk and litigation
costs. Its recent settlements (Zetia, Malerone, Cutivate, Vanos and Locoid
Lipocream) are likely to realize cumulative revenues of Rs15.7B over FY12-
FY17E. We estimate an NPV of Rs18.5/share from settled FTF products.
 Innovation pipeline offers upsides: GNP has a credible track record of
monetizing its innovative drug pipeline. It has realized US$207MM since FY04
by out-licensing its novel compounds undergoing R&D to large pharma
companies. Out-licensing mitigates risk and funds R&D activities. GNP's
current pipeline has 8 compounds under various stages of development. Our
pipeline valuation of Rs29.5/share takes into account only 3 compounds (1 in
phase III, 2 out-licensed), leaving scope for upside surprises from others.
 Financial discipline improving: Historically, GNP’s cash flows have been
strained due to aggressive capex and entry into semi-regulated markets
characterized with high receivables. An interim lean period for R&D outlicensing
income (FY09-FY10) resulted in sharp increase in gearing levels.
Management has increased focused on financial discipline, reducing capex and
curtailing working capital (evident in FY11). We expect cash flows to improve
going forward and help reduce gearing from 0.9x in FY11 to 0.3x by FY14E.
 Valuations and Key Risks. Our PT of Rs400 values the base business at
Rs352per share on adjusted 18xFY13E P/E, FTF opportunity at Rs18.5/share
NCE pipeline at Rs29.5/share. Key risks include potential regulatory issues (esp.
related to USFDA), inability to monetize the NCE pipeline, further deterioration
in working capital and inability to expand product basket.