Macquaire TOP Pick:: Buy Glenmark Pharmaceuticals- Robust US corroborates thesis

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Glenmark Pharmaceuticals
Robust US corroborates our thesis
Event
 Adjusted for out-licensing income, GNP reported 1Q FY12 revenue of Rs7.6b
(up27% YoY, Macq est. Rs7.6b), EBITDA of Rs1.86b (24.6% margin, Macq est.
22.5%) and PAT of Rs1.1bn (up 22% YoY, Macq estimate Rs1.1b) ahead of
consensus and in line with our estimates. We maintain GNP as our top-pick.
 Guidance for FY12: GNP maintained its guidance of 25% sales growth for
base business (ex-licensing income), with an EBITDA margin of ~ 23%.
Impact
 US sales - strong momentum – key to our thesis (~ 33% of top-line): US
sales came in at US$55m (up 37%YoY, 10% QoQ) driven by market share gain in
key products (Oxycodone, Felodipine & launched basket of five hormonal
product.). Niche upcoming launches Orthotricyclene (Jul-11), Urosodil (Aug-
11), Malarone (sept-11) and Cutivate (Mar-12) should further drive momentum
in coming quarters. GNP has already gained >10% market share in the four
Oral Contraceptive (OC) products launched in FY11.
 Strong emerging market formulation growth (> 50% of the top-line):
India (~30% of top line) grew by 20% YoY on account of market share
gain in key therapeutic areas and new launches. Secondary sales growth
for GNP for 1QFY12 was at ~19% vs. 14% for the industry (ORG-IMS).
LATAM (~ 7% of top-line): grew 62% YoY on back of restructuring of
operations carried out in the past. Brazil contributes > 80% of sales.
SRM (~14% of top-line): grew 43% YoY. Russia is the most important
market in SRM, with projected sales of US$50m in FY12. Secondary
sales continue to be strong (Russia up 30% YoY, Africa up 46% YoY &
Asia up 40% YoY) and should be reflected in primary sales going forward.
 Conference call take-away: (a) Debt now stands at Rs16.5b (down from
Rs19.5b @ end of FY11). (b) R&D expense for 1QFY12 was Rs400m with no
increase in intangibles, FY12 R&D expense guidance @ Rs2b (c) Capex
guidance for FY12 @ Rs2.5b with Rs500m spent in 1QFY12. (d) GNP has
converted US$150m of short-term debt into long term with 3 to 5 year tenure
in Jun-11. ST debt is now ~ Rs 5b way below Rs 14.8b at the end of FY11.
Earnings and target price revision
 Slight adjustment to earnings for FY12/13E to Rs20/25 from Rs 19.5/25.
Introducing FY14 EPS estimate of Rs29. Maintain OP and TP of Rs465.
Price catalyst
 12-month price target: Rs465.00 based on a Sum of Parts methodology.
 Catalyst: 1) Crofelemer approval 2) 2) Key launches in US
Action and recommendation
 Valuations look attractive in our view, with GNP trading at a PER of 13.7x
FY12E earnings, adjusted for exclusivity and NCE value. Our Top pick.