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Glenmark Pharma
1Q results surprise positively; Raise PO
1Q Profits up 23% YoY; beat forecasts on robust base biz.
Glenmark’s 1Q PAT at Rs2.1bn (up 23% YoY) was 30% ahead of BofA-MLe, led
by stronger revenues at Rs7.6bn (up 28% YoY, 5% above est) & higher margins.
EBITDA at Rs1.9bn, up 33% was 14% above BofA-MLe, thanks to stronger
margins of 24.5% (vs 23.5% est, up 90bps YoY). Lower interest cost (down 30%
QoQ) as well as depreciation (under IFRS) led to further surprise (vs our
estimates). We raise our base business forecasts to factor stronger margins,
thereby raising PO to Rs380 (base business: Rs345/sh, NCE NPV: Rs35/sh).
Sustained growth momentum across businesses
Strength in Speciality business (up 34%) was led by above industry growth in
India formulations at 20% (Rs2.25bn) along with sustained strength in SRM
markets (Rs1.04bn, up 43% YoY). Latam business grew strongly at 62% YoY,
further boosting topline. Generics business grew 28% YoY thanks to US generics
growth of 37% YoY (Rs2.5bn, up 12% QoQ), aided by recent new launches. We
remain upbeat on sustained strength in Glenmark’s base business, with US (33%
of sales) and India (30% of sales) to remain key drivers going ahead.
Management call highlights
(a) US generics growth to sustain pace on 20+ ANDA approvals in recent past, (b)
Total filings Oral contraceptive (OC) segment in US between 22-24, with 10-12
pending approval, expect ramp-up ahead, (c) US$15mn receipt from Salix, mainly
to fund capex for Crofelemer supplies, (d) Malarone (US$64mn, GSK) to be
launched as FTF in 3Q; no medium-term competition, (e) Net debt at Rs18.3bn
(vs Rs18.8bn in Mar-11), to reduce to ~Rs15bn by FY12 on recent milestone
receipts, (f) Debtor days reduced to ~125 days (vs 138 days in Mar-11).
Attractive valuations; Outlicensing – key upside risk
Trading at 14x FY13E earnings (adj NCE val. Rs35), Glenmark’s valuation is at
20%+ disc. to peers despite stronger earnings profile (CAGR of 30% vs 21% avg).
1Q: Solid business momentum
Glenmark reported strong 28% YoY growth in topline in 1Q with revenues of
Rs7.6bn, beating our estimates by 5%. This was largely driven by strong 28-29%
growth across Speciality & Generics segment. While domestic formulations
sustained strong march (20% YoY growth vs 13% for industry), recovery in
Latam/RoW markets continued to surprise positively led by robust regulatory
pipeline for key markets. US generics growth surprised strongly at 37% YoY
(Rs2.5bn, up 12% QoQ), thanks to impact of 19+ approvals in FY11 flowing
through. We expect impact of recent new product approvals is likely to sustain in
coming quarters, with upside from Malarone (US$68mn, FTF) exclusivity.
Speciality Business
Glenmark’s Specialty business registered robust 29% growth YoY with sales of
Rs4.1bn, led by strong growth in India, Latam and RoW markets. Steady new
launches, increased focus on key therapy segments of dermatology, respiratory
(including inhalers) is likely to sustain 20%+ growth momentum going forward.
Domestic formulations (30% of sales) grew 20% in 3Q, stronger than
industry (~13% growth). Market share gains in key therapy segments like
CVS, Respiratory and Dermatology helped Glenmark improve its ranking in
the domestic market. We expect Glenmark to sustain 18-20% growth in
domestic market led by strength in chronic therapy focus and steady new
launches (20-25 new launches) as well as in-licensing.
Semi-regulated markets (SRM) recovery sustained strong 43% growth
YoY, partly affected by rupee appreciation. SRM sales at Rs1.05bn were led
by key markets of Africa (up 46%), Russia (up 28%, ranked 61st) and CIS.
Secondary market growth showed strong improvement, likely to reflect in the
primary sales growth too. Focus on cash flow generation resulted in reducing
receivable days, hence higher profitability for these markets. Filed 18
dossiers for the SRM, with 5 approvals received during the quarter,
maintaining robust pipeline buildup.
Latam business maintained recovery momentum with strong 62% growth
YoY at Rs592mn (up 11% QoQ). Profitability is likely to improve as new
launches would help recover high fixed cost base. Glenmark filed 13 dossiers
during the quarter and received 1 approval, strengthening pipeline.
European business grew 2% during the quarter, with sales of Rs215mn due
to weakness in the E.Europe market owing to political turmoil.
Generics Business
Glenmark’s Generics (44% of sales) business registered 28% growth YoY with
sales of Rs3.4bn, down 10% QoQ. This was mainly led by strong growth
momentum in US, thanks to recent new launches.
US business (33% of sales) registered 37% YoY growth in rupee terms with
sales of (Rs2.5bn, up 12% QoQ), boosted by impact of 10-12 launches in
last 2-3 quarters. The company had received 21 ANDA approvals in FY11,
and 4 in 1Q (vs 11 in FY10), implying sustained momentum in US business.
The company has a portfolio of 69 approved products for the US market.
The company intends to file 15-20 ANDAs every year to build its US generics
pipeline (40 ANDAs pending approval). We also expect launch of Malarone
exclusivity in Sep-11, to boost profitability. The company expects to file 4
new ANDAs in 2Q, with 7 anticipated launches.
EU operations continue to grow on a very small base as newer markets are
explored and in-licensing products help pipeline launches. Entry into UK
market has substantially improved momentum. EU generics grew 118% YoY
(Rs175mn) during 1Q, up 11% sequentially.
API business grew by mere 2% to Rs646mn, however improving business
mix and resultant profitability.
Latam (oncology) business is expected to grow on back of steady launches
and scale-up in Peru and Mexico markets (apart from Argentina). This
segment registered 62% decline in business (Rs29mn) during 1Q.
Research and Development
Presently, the company has a pipeline of 4 NCE and NBE molecules in clinical
stage, apart from two in-licensed molecules Crofelemer (in Phase III) and a
monoclonal antibody (Mab), GBR 900.
Crofelemer (for HIV associated diarrhea), currently in Phase III clinical
testing is expected to be ready for RoW launch in FY12-end. Glenmark
expects peak sales of US$80mn from this product in RoW markets.
Glenmark is also the sole supplier to Salix Pharma, USA for developed
markets. As part of its deal with Salix, Glenmark received advance
commitment fee of US$15mn (out of total US$21.6mn, due from July-12 in 5
annual installments) to fund its capex needs for product supplies.
Revamilast (GRC 4039, PDE4 inhibitor, inflammation, multiple sclerosis) has
completed Phase I and is expected to enter Phase IIb trials in UK (for
asthma, rheumatoid arthritis) in 1HFY12E.
GRC 15300 (neuropathic pain) has completed Phase I trials in UK and has
been out licensed to Sanofi-Aventis for further development. On completion
of Phase I trials Glenmark is entitled to receive milestone income of
~US$5mn in 1H. Phase IIa proof of concept studies are likely to be initiated
in 3Q by Sanofi.
In the biologics space, GBR 500 (MAb, anti-inflammation), which has
completed Phase I trials in US post outlicensing it to Sanofi in June 2011.
Sanofi will file a fresh IND in 3Q to initiate proof of concept trial for Crohn’s
disease. GBR 600 is progressing well in pre-clinical trials in the Swiss facility
of Glenmark. GBR 600 has received approval for Phase I trials by UK MHRA.
Attractive valuations; PO of Rs380
Glenmark is trading at 18.1x FY12E and 14x FY12E EPS, which is at 13%
discount to the sector average (~16x FY13E). We believe this is unwarranted,
given robust earnings trajectory ahead and improving Balance Sheet health. We
believe the stock should re-rate to trade atleast in line with mid-cap sector
average, justified by 30% core EPS CAGR over FY11-13E (vs 21% avg).
Our revised PO of Rs380 is based on SoTP comprising Rs345 for the base
business and Rs35 for NCE research valuation. Our Rs345 valuation of
Glenmark's base business is based on 16x FY13E core EPS, in line with mid-cap
pharma peers target multiple. We believe Glenmark's re-rating is justified, noting
strong rebound in base business momentum as well as improving Balance Sheet.
Upside triggers: (a) Positive newsflow on NCE pipeline, including potential
outlicensing may provide upside risks to estimates. We have not factored any
outlicensing income in our earnings forecast for Glenmark. (b) Likely launch of
Malarone (3QFY12).
Price objective basis & risk
Glenmark Pharm (XVQWF)
Our revised PO of Rs380 is based on SoTP comprising Rs345 for the base
business and Rs35 for NCE research valuation. Our Rs345 valuation of
Glenmark's base business is based on 16x FY13E core EPS, in line with its midcap
peers. We believe Glenmark's re-rating is justified, noting robust earnings
visibility, improving working capital and reduced leverage. Our base-case
research valuation of Rs35 is based on NPV of GRC 15300 (outlicensed to
Sanofi) and GBR 500 (biologic Mab, outlicensed to Sanofi), but not including
valuation for 5 other molecules in clinical trials stage with uncertainty on
outlicensing opportunities in the medium term. This suggests an overall fair value
of Rs380/sh.
Downside risks: a) Delay in progress/failure of research molecules, leading to
delay in milestone receipts (b) Execution risks in the base business (c) Litigation
and regulatory risks for the generics entity (e) High debtor position implying high
working capital position.
Upside risks: a) Better-than-expected base business pickup, b) Better-thanexpected
outcome of Phase II results on key molecules, c) earlier-than-expected
receipt of milestone income from existing partner.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Glenmark Pharma
1Q results surprise positively; Raise PO
1Q Profits up 23% YoY; beat forecasts on robust base biz.
Glenmark’s 1Q PAT at Rs2.1bn (up 23% YoY) was 30% ahead of BofA-MLe, led
by stronger revenues at Rs7.6bn (up 28% YoY, 5% above est) & higher margins.
EBITDA at Rs1.9bn, up 33% was 14% above BofA-MLe, thanks to stronger
margins of 24.5% (vs 23.5% est, up 90bps YoY). Lower interest cost (down 30%
QoQ) as well as depreciation (under IFRS) led to further surprise (vs our
estimates). We raise our base business forecasts to factor stronger margins,
thereby raising PO to Rs380 (base business: Rs345/sh, NCE NPV: Rs35/sh).
Sustained growth momentum across businesses
Strength in Speciality business (up 34%) was led by above industry growth in
India formulations at 20% (Rs2.25bn) along with sustained strength in SRM
markets (Rs1.04bn, up 43% YoY). Latam business grew strongly at 62% YoY,
further boosting topline. Generics business grew 28% YoY thanks to US generics
growth of 37% YoY (Rs2.5bn, up 12% QoQ), aided by recent new launches. We
remain upbeat on sustained strength in Glenmark’s base business, with US (33%
of sales) and India (30% of sales) to remain key drivers going ahead.
Management call highlights
(a) US generics growth to sustain pace on 20+ ANDA approvals in recent past, (b)
Total filings Oral contraceptive (OC) segment in US between 22-24, with 10-12
pending approval, expect ramp-up ahead, (c) US$15mn receipt from Salix, mainly
to fund capex for Crofelemer supplies, (d) Malarone (US$64mn, GSK) to be
launched as FTF in 3Q; no medium-term competition, (e) Net debt at Rs18.3bn
(vs Rs18.8bn in Mar-11), to reduce to ~Rs15bn by FY12 on recent milestone
receipts, (f) Debtor days reduced to ~125 days (vs 138 days in Mar-11).
Attractive valuations; Outlicensing – key upside risk
Trading at 14x FY13E earnings (adj NCE val. Rs35), Glenmark’s valuation is at
20%+ disc. to peers despite stronger earnings profile (CAGR of 30% vs 21% avg).
1Q: Solid business momentum
Glenmark reported strong 28% YoY growth in topline in 1Q with revenues of
Rs7.6bn, beating our estimates by 5%. This was largely driven by strong 28-29%
growth across Speciality & Generics segment. While domestic formulations
sustained strong march (20% YoY growth vs 13% for industry), recovery in
Latam/RoW markets continued to surprise positively led by robust regulatory
pipeline for key markets. US generics growth surprised strongly at 37% YoY
(Rs2.5bn, up 12% QoQ), thanks to impact of 19+ approvals in FY11 flowing
through. We expect impact of recent new product approvals is likely to sustain in
coming quarters, with upside from Malarone (US$68mn, FTF) exclusivity.
Speciality Business
Glenmark’s Specialty business registered robust 29% growth YoY with sales of
Rs4.1bn, led by strong growth in India, Latam and RoW markets. Steady new
launches, increased focus on key therapy segments of dermatology, respiratory
(including inhalers) is likely to sustain 20%+ growth momentum going forward.
Domestic formulations (30% of sales) grew 20% in 3Q, stronger than
industry (~13% growth). Market share gains in key therapy segments like
CVS, Respiratory and Dermatology helped Glenmark improve its ranking in
the domestic market. We expect Glenmark to sustain 18-20% growth in
domestic market led by strength in chronic therapy focus and steady new
launches (20-25 new launches) as well as in-licensing.
Semi-regulated markets (SRM) recovery sustained strong 43% growth
YoY, partly affected by rupee appreciation. SRM sales at Rs1.05bn were led
by key markets of Africa (up 46%), Russia (up 28%, ranked 61st) and CIS.
Secondary market growth showed strong improvement, likely to reflect in the
primary sales growth too. Focus on cash flow generation resulted in reducing
receivable days, hence higher profitability for these markets. Filed 18
dossiers for the SRM, with 5 approvals received during the quarter,
maintaining robust pipeline buildup.
Latam business maintained recovery momentum with strong 62% growth
YoY at Rs592mn (up 11% QoQ). Profitability is likely to improve as new
launches would help recover high fixed cost base. Glenmark filed 13 dossiers
during the quarter and received 1 approval, strengthening pipeline.
European business grew 2% during the quarter, with sales of Rs215mn due
to weakness in the E.Europe market owing to political turmoil.
Generics Business
Glenmark’s Generics (44% of sales) business registered 28% growth YoY with
sales of Rs3.4bn, down 10% QoQ. This was mainly led by strong growth
momentum in US, thanks to recent new launches.
US business (33% of sales) registered 37% YoY growth in rupee terms with
sales of (Rs2.5bn, up 12% QoQ), boosted by impact of 10-12 launches in
last 2-3 quarters. The company had received 21 ANDA approvals in FY11,
and 4 in 1Q (vs 11 in FY10), implying sustained momentum in US business.
The company has a portfolio of 69 approved products for the US market.
The company intends to file 15-20 ANDAs every year to build its US generics
pipeline (40 ANDAs pending approval). We also expect launch of Malarone
exclusivity in Sep-11, to boost profitability. The company expects to file 4
new ANDAs in 2Q, with 7 anticipated launches.
EU operations continue to grow on a very small base as newer markets are
explored and in-licensing products help pipeline launches. Entry into UK
market has substantially improved momentum. EU generics grew 118% YoY
(Rs175mn) during 1Q, up 11% sequentially.
API business grew by mere 2% to Rs646mn, however improving business
mix and resultant profitability.
Latam (oncology) business is expected to grow on back of steady launches
and scale-up in Peru and Mexico markets (apart from Argentina). This
segment registered 62% decline in business (Rs29mn) during 1Q.
Research and Development
Presently, the company has a pipeline of 4 NCE and NBE molecules in clinical
stage, apart from two in-licensed molecules Crofelemer (in Phase III) and a
monoclonal antibody (Mab), GBR 900.
Crofelemer (for HIV associated diarrhea), currently in Phase III clinical
testing is expected to be ready for RoW launch in FY12-end. Glenmark
expects peak sales of US$80mn from this product in RoW markets.
Glenmark is also the sole supplier to Salix Pharma, USA for developed
markets. As part of its deal with Salix, Glenmark received advance
commitment fee of US$15mn (out of total US$21.6mn, due from July-12 in 5
annual installments) to fund its capex needs for product supplies.
Revamilast (GRC 4039, PDE4 inhibitor, inflammation, multiple sclerosis) has
completed Phase I and is expected to enter Phase IIb trials in UK (for
asthma, rheumatoid arthritis) in 1HFY12E.
GRC 15300 (neuropathic pain) has completed Phase I trials in UK and has
been out licensed to Sanofi-Aventis for further development. On completion
of Phase I trials Glenmark is entitled to receive milestone income of
~US$5mn in 1H. Phase IIa proof of concept studies are likely to be initiated
in 3Q by Sanofi.
In the biologics space, GBR 500 (MAb, anti-inflammation), which has
completed Phase I trials in US post outlicensing it to Sanofi in June 2011.
Sanofi will file a fresh IND in 3Q to initiate proof of concept trial for Crohn’s
disease. GBR 600 is progressing well in pre-clinical trials in the Swiss facility
of Glenmark. GBR 600 has received approval for Phase I trials by UK MHRA.
Attractive valuations; PO of Rs380
Glenmark is trading at 18.1x FY12E and 14x FY12E EPS, which is at 13%
discount to the sector average (~16x FY13E). We believe this is unwarranted,
given robust earnings trajectory ahead and improving Balance Sheet health. We
believe the stock should re-rate to trade atleast in line with mid-cap sector
average, justified by 30% core EPS CAGR over FY11-13E (vs 21% avg).
Our revised PO of Rs380 is based on SoTP comprising Rs345 for the base
business and Rs35 for NCE research valuation. Our Rs345 valuation of
Glenmark's base business is based on 16x FY13E core EPS, in line with mid-cap
pharma peers target multiple. We believe Glenmark's re-rating is justified, noting
strong rebound in base business momentum as well as improving Balance Sheet.
Upside triggers: (a) Positive newsflow on NCE pipeline, including potential
outlicensing may provide upside risks to estimates. We have not factored any
outlicensing income in our earnings forecast for Glenmark. (b) Likely launch of
Malarone (3QFY12).
Price objective basis & risk
Glenmark Pharm (XVQWF)
Our revised PO of Rs380 is based on SoTP comprising Rs345 for the base
business and Rs35 for NCE research valuation. Our Rs345 valuation of
Glenmark's base business is based on 16x FY13E core EPS, in line with its midcap
peers. We believe Glenmark's re-rating is justified, noting robust earnings
visibility, improving working capital and reduced leverage. Our base-case
research valuation of Rs35 is based on NPV of GRC 15300 (outlicensed to
Sanofi) and GBR 500 (biologic Mab, outlicensed to Sanofi), but not including
valuation for 5 other molecules in clinical trials stage with uncertainty on
outlicensing opportunities in the medium term. This suggests an overall fair value
of Rs380/sh.
Downside risks: a) Delay in progress/failure of research molecules, leading to
delay in milestone receipts (b) Execution risks in the base business (c) Litigation
and regulatory risks for the generics entity (e) High debtor position implying high
working capital position.
Upside risks: a) Better-than-expected base business pickup, b) Better-thanexpected
outcome of Phase II results on key molecules, c) earlier-than-expected
receipt of milestone income from existing partner.
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