| Glenmark Pharmaceuticals Ltd. (GNP IN) 4QFY14 First Cut: EBITDA beat in the quarter highlights upside from emerging markets | Overweight Price: Rs603.05 07 May 2014 Price Target: Rs645.00 PT End Date: 30 Sep 2014 | |
Glenmark reported a better-than-expected operating results with 4Q FY14 EBITDA at Rs3.8bn (+30% YoY), which was ahead of JPMe and consensus of Rs3.6bn driven by the strong revenue growth of 28%. The outperformance in revenue was entirely driven by the Emerging Markets (SRM-RoW, LatAm), API and Europe. While US revenue was mostly in line with our expectation, domestic revenue growth at 8% YoY in the quarter was disappointing (similar to Lupin’s results). The press release outlined increasing pace of ANDA filings in FY15 and also highlighted focus on new therapy area filings in the US, which should support medium-term growth for the company. Adjusted PAT (adjusted provision for Tarka litigation claim and apportioning tax on PBT) was at Rs2.15bn (vs. JPMe Rs2bn). Net debt as of Mar-14 was Rs24.7bn, declining QoQ (vs. Rs25.6bn in Dec-13).
· Emerging market performance better than expected. GNP’s emerging market exposure provides the balance in quarters with muted trends in US. SRM revenue grew by 49% YoY (+14% QoQ) with continued strong performance in Russia, Ukraine and ME&A/Asia market. Revenue growth in LatAm was +34% YoY as growth in Mexico, Venezuela and also some upside from launch of generic Seritide in Mexico in the quarter. The company indicated that its Brazil subsidiary recorded moderate growth at 10% in local currency in 4Q. While approvals from Brazil regulatory authority are still delayed, the 10% growth highlights some improvement, in our view. GNP’s Europe revenue growth of 29.5% was aided by continued strong trend in Central Eastern Europe region (27% growth in secondary sales while the market stagnated).
· US growth inline, but prospects improving post FY16. As expected, GNP reported muted US revenue growth of 3% YoY on constant-currency basis; however, declined sequentially ($81mn vs. $85mn in 3Q FY14) impacted by the lumpiness and lag in ANDA approvals. In its press release, GNP highlighted 20 ANDA filings in FY14 and expects to file another 10 applications in 1Q FY15. Out of the 20 filings last year, only two were immediate release products with other filings in niche segments like dermatology (3), Oncology injectables (4), OCs (4), complex oral solids (4) and filing in new therapy areas (like immunosuppressant and complex injectable). GNP indicated that it expects to file another six complex injectables in FY15.
· India growth was below expectations: Similar to LPC, GNP growth was lower than our expectation at ~8% (vs. JPMe of mid-teen growth). As per the press release (ORG IMS MAT Mar-14 data), GNP growth was 17.65% in the quarter vs. industry growth of 10.1% and the company witnessed market share expansion in all key segments.
· NCE/NBE Pipeline update: On GRC 15300 (licensing agreement with Sanofi), GNP indicated that TRPV3 inhibitor for chronic pain did not meet the primary endpoint in the Phase II proof of concept trial. On mPGES-1 inhibitor, GNP has filed a Phase 1 application for first-in-human trial with the MHRA, UK, which will be initiated soon (likely to get completed by Jan-15). On GBR 500, GNP indicated that Sanofi has terminated the Ulcerative Colitis Phase II POC study but announced a new phase II POC study for Multiple Sclerosis (paid $5Mn milestone payment in 1QFY15).
· Conference call at 8.30AM tomorrow (9th May): Dial in (+91 22 6000 5900); PIN: 11766567#. On the call we will look for commentary on: (1) FY15E revenue and EBITDA guidance (JPMe Rs14.5bn vs. Street Rs15bn); (2) the growth outlook in key markets (US, India, LatAm, SRM); (3) net debt reduction guidance; (4) the R&D spend and margin outlook for the medium term; and (5) the innovative R&D pipeline update.
Table 1: GNP: Segmental Summary
Rs MM, YE Mar.
|
4QFY13
|
4QFY14
|
% YoY
|
3QFY14
|
% QoQ
|
FY13
|
FY14
|
% YoY
|
India
|
3,550.3
|
3,830.0
|
7.9
|
3,812.3
|
0.5
|
13,095.8
|
15,104.9
|
15.3
|
RoW-SRM
|
2,293.8
|
3,425.3
|
49.3
|
3,009.6
|
13.8
|
8,493.0
|
9,869.0
|
16.2
|
Latin America
|
792.7
|
1,061.7
|
33.9
|
1,139.3
|
(6.8)
|
3,467.9
|
4,045.5
|
16.7
|
Europe
|
1,491.8
|
1,932.0
|
29.5
|
1,358.4
|
42.2
|
3,723.7
|
5,060.7
|
35.9
|
US
|
4,291.4
|
5,008.5
|
16.7
|
5,213.6
|
(3.9)
|
16,887.4
|
20,270.2
|
20.0
|
API
|
938.6
|
1,530.6
|
63.1
|
1,479.1
|
3.5
|
3,976.4
|
5,353.5
|
34.6
|
Total
|
13,358.6
|
17,035.6
|
27.5
|
16,017.5
|
6.4
|
50,137.2
|
60,069.4
|
19.8
|
Source: Company reports.
Table 2: GNP: Quarterly Results Snapshot
Rs MM, YE Mar.
|
4QFY13
|
4QFY14
|
% YoY
|
3QFY14
|
% QoQ
|
FY13
|
FY14
|
% YoY
|
Total Revenues
|
13,354.9
|
16,817.4
|
25.9
|
16,012.2
|
5.0
|
50,123.4
|
59,838.5
|
19.4
|
Other operating Income
|
3.8
|
218.2
|
5,702.7
|
5.3
|
4,024.4
|
13.8
|
230.8
|
1,572.6
|
Total Income
|
13,358.6
|
17,035.6
|
27.5
|
16,017.5
|
6.4
|
50,137.2
|
60,069.3
|
19.8
|
EBITDA (Adj)
|
2,746.5
|
3,568.8
|
29.9
|
3,649.7
|
(2.2)
|
10,369.6
|
12,735.0
|
22.8
|
EBITDA Margin (%)
|
20.6
|
21.3
|
22.8
|
20.9
|
21.3
| |||
Depreciation
|
(318.1)
|
(603.0)
|
89.6
|
(611.0)
|
(1.3)
|
(1,270.1)
|
(2,168.0)
|
70.7
|
Interest
|
(435.9)
|
(464.3)
|
6.5
|
(472.7)
|
(1.8)
|
(1,600.1)
|
(1,885.9)
|
17.9
|
Other income
|
(49.6)
|
(120.7)
|
143.5
|
50.8
|
(337.7)
|
93.7
|
97.5
|
4.1
|
Out-licensing Income
|
0.0
|
247.4
|
0.0
|
493.0
|
365.5
| |||
MTM Forex Gain / Loss
|
(146.0)
|
0.0
|
0.0
|
(696.0)
|
0.0
| |||
Profit before tax
|
1,796.9
|
452.9
|
(74.8)
|
2,616.8
|
(82.7)
|
7,390.1
|
6,968.8
|
(5.7)
|
Tax Expense
|
(45.7)
|
(18.7)
|
(59.0)
|
(473.5)
|
(96.0)
|
(1,107.2)
|
(1,512.7)
|
36.6
|
Tax Rate (%)
|
2.5
|
4.1
|
18.1
|
15.0
|
21.7
| |||
Pre-exceptional PAT
|
1,751.3
|
434.1
|
(75.2)
|
2,143.3
|
(79.7)
|
6,282.9
|
5,456.0
|
(13.2)
|
Minority Interest
|
(30.4)
|
(3.5)
|
19.1
|
(118.3)
|
(82.6)
|
(33.3)
|
(59.7)
| |
Reported PAT
|
1,720.9
|
430.7
|
(75.0)
|
2,162.4
|
(80.1)
|
6,200.3
|
5,422.8
|
(12.5)
|
FD EPS
|
6.36
|
1.59
|
(75.0)
|
7.98
|
(80.1)
|
22.9
|
20.0
|
(12.6)
|
Raw materials
|
3,770.0
|
4,438.7
|
17.7
|
5,373.1
|
(17.4)
|
16,536.0
|
18,730.2
|
13.3
|
as % of sales
|
28.2
|
26.4
|
33.5
|
33.3
|
31.4
| |||
Employee cost
|
2,034.5
|
2,773.9
|
36.3
|
2,734.7
|
1.4
|
7,829.5
|
10,261.5
|
31.1
|
as % of sales
|
15.2
|
16.5
|
17.1
|
15.8
|
17.2
| |||
Other Expenditure
|
4,953.7
|
6,006.8
|
21.3
|
4,260.0
|
41.0
|
15,605.1
|
17,977.1
|
15.2
|
as % of sales
|
37.1
|
35.8
|
26.6
|
31.4
|
30.1
|
Source: Company reports. Note: 4QFY14 includes Rs2.17bn exceptional (Tarka liability claim).
Investment Thesis
We believe that GNP’s generic business growth, aided by a pick-up in US and emerging markets growth momentum, EBITDA margin expansion and a reduction in leverage through sustained increases in cash flow generation, should help narrow the valuation gap to its domestic peers. Further, GNP’s innovation R&D pipeline provides scope for upside surprise with new out-licensing opportunities
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