Strong Show; Upgrade To Buy On TP Roll-over To FY16
Glenmark Pharmaceuticals· (GPL) 3QFY14 performance showed a mixed trend. While
the 120bps QoQ expansion in margins was a key positive, stagnant US revenue and
lack of visibility on key product approvals/launches is a cause for concern. We have
retained our estimates (9MFY14 profit is 71% of our FY14 estimate), but upgraded the
rating on GPL to Buy (Hold earlier) as we rolled over our TP to FY16E earnings.
Consequently, our TP stands revised upwards at Rs651 (16xFY16E EPS of Rs40.7) from
Rs562 earlier (17xFY15E EPS of Rs33.0).
Operational performance above expectations:GPL¶V performance was above expectations
at the operating level. Revenue growth of 20% YoY was driven by Europe (combined
business ± generics+specialty - up 58% YoY) and API business (up 48% YoY, including
US$1mn from Crofelemer API supply to Salix), while domestic business growth (up 15% YoY,
led by strong growth in covered therapies) was healthy despite industry slowdown. The US
business declined by ~US$6mnQoQ, partly because of GPL suspending the sales of generic
Montelukast tablets following non-viability and lack of interesting product launches in the US
(7 approvals YTD FY14), while ROW markets grew strongly QoQ due to the seasonality effect
in key markets like Russia with the onset of winter. Following higher sales from low-margin
European business, gross margins were flat, but EBITDA margin at 22.8% (up 250bps YoY,
excl. milestone income in 3QFY13 and 120bps QoQ) was above our/Bloomberg consensus
estimates of 21%/21.5%, respectively, owing to higher operating leverage. Notably, GPL
achieved break-even in Europe operations. Reported PAT includes forex gains of Rs11mn.
US business rebound is key: *3/¶V 86 EXVLQHVV was stagnant for the past six quarters, at
around US$80mn (barring 2QFY14), owing to lack of interesting product launches in the US
and slow ramp-up of oral contraceptive portfolio. Given the fact that the US is one of the key
growth drivers, it is imperative that the approval/launch run-rate picks up in this market for
*3/¶V valuation to sustain. While product approvals in the US are subject to the US Food and
Drug Administration¶V timeline, we have noted some interesting generic product opportunities
in FY15 viz. Orthotricyclen lo (oral contraceptive drug, market size ~US$400mn, launch likely
on 31 December, 2015, as per the settlement with the innovator, five-six player market),
Vanos (dHUPDWRORJ\ GUXJ *3/¶V ODXQFK postponed from December 2013 to June 2014 post
Perrigo, the first-to-file or FTF) SOD\HU¶V VHWWOHPHQW ZLWK WKH LQQRYDWRU WR ODXQFK its product in
December 2013, market size US$40mn, four-player market likely) and Finacea (dermatology
drug, market size ~US$100mn, GPL has FTF and its 30-month period expires in June 2015).
Conference call takeaways: 1) GPL¶V net debt stood at Rs25.6bn as of end-December
2013, while the net working capital cycle improved slightly from 106 days (March 2013) to 110
days (December 2013). 2) GPL expects domestic growth to remain strong, at least until
3QFY15. 3) GPL plans to launch Crofelemer drug in FY15 in a few emerging markets, but
does not expect it to be a significant revenue driver initially. 4) Expects over 15% growth in
emerging markets and over 20% growth in API business annually. 5) Expects strong growth in
European business next year. 6) Capex is likely to be around Rs4bn in FY14E.
��
Glenmark Pharmaceuticals· (GPL) 3QFY14 performance showed a mixed trend. While
the 120bps QoQ expansion in margins was a key positive, stagnant US revenue and
lack of visibility on key product approvals/launches is a cause for concern. We have
retained our estimates (9MFY14 profit is 71% of our FY14 estimate), but upgraded the
rating on GPL to Buy (Hold earlier) as we rolled over our TP to FY16E earnings.
Consequently, our TP stands revised upwards at Rs651 (16xFY16E EPS of Rs40.7) from
Rs562 earlier (17xFY15E EPS of Rs33.0).
Operational performance above expectations:GPL¶V performance was above expectations
at the operating level. Revenue growth of 20% YoY was driven by Europe (combined
business ± generics+specialty - up 58% YoY) and API business (up 48% YoY, including
US$1mn from Crofelemer API supply to Salix), while domestic business growth (up 15% YoY,
led by strong growth in covered therapies) was healthy despite industry slowdown. The US
business declined by ~US$6mnQoQ, partly because of GPL suspending the sales of generic
Montelukast tablets following non-viability and lack of interesting product launches in the US
(7 approvals YTD FY14), while ROW markets grew strongly QoQ due to the seasonality effect
in key markets like Russia with the onset of winter. Following higher sales from low-margin
European business, gross margins were flat, but EBITDA margin at 22.8% (up 250bps YoY,
excl. milestone income in 3QFY13 and 120bps QoQ) was above our/Bloomberg consensus
estimates of 21%/21.5%, respectively, owing to higher operating leverage. Notably, GPL
achieved break-even in Europe operations. Reported PAT includes forex gains of Rs11mn.
US business rebound is key: *3/¶V 86 EXVLQHVV was stagnant for the past six quarters, at
around US$80mn (barring 2QFY14), owing to lack of interesting product launches in the US
and slow ramp-up of oral contraceptive portfolio. Given the fact that the US is one of the key
growth drivers, it is imperative that the approval/launch run-rate picks up in this market for
*3/¶V valuation to sustain. While product approvals in the US are subject to the US Food and
Drug Administration¶V timeline, we have noted some interesting generic product opportunities
in FY15 viz. Orthotricyclen lo (oral contraceptive drug, market size ~US$400mn, launch likely
on 31 December, 2015, as per the settlement with the innovator, five-six player market),
Vanos (dHUPDWRORJ\ GUXJ *3/¶V ODXQFK postponed from December 2013 to June 2014 post
Perrigo, the first-to-file or FTF) SOD\HU¶V VHWWOHPHQW ZLWK WKH LQQRYDWRU WR ODXQFK its product in
December 2013, market size US$40mn, four-player market likely) and Finacea (dermatology
drug, market size ~US$100mn, GPL has FTF and its 30-month period expires in June 2015).
Conference call takeaways: 1) GPL¶V net debt stood at Rs25.6bn as of end-December
2013, while the net working capital cycle improved slightly from 106 days (March 2013) to 110
days (December 2013). 2) GPL expects domestic growth to remain strong, at least until
3QFY15. 3) GPL plans to launch Crofelemer drug in FY15 in a few emerging markets, but
does not expect it to be a significant revenue driver initially. 4) Expects over 15% growth in
emerging markets and over 20% growth in API business annually. 5) Expects strong growth in
European business next year. 6) Capex is likely to be around Rs4bn in FY14E.
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