Glenmark Pharma: Buy

Strong research capability in both the innovative and generic space differentiates Glenmark Pharma from other mid-sized pharma companies. Focus on niche therapy areas and a good product pipeline should help the company sustain healthy growth over the next 2-3 years. At the current market price of Rs 401, the stock trades at 14.7 times FY14 earnings, a 20 per cent discount to the sector.

With significant presence in dermatology and cardiovascular therapies, Glenmark’s domestic formulation business accounts for over a fourth of its revenues. Brand-building efforts have helped the company sustain market share gains in key therapy areas such as dermatology, respiratory and cardiology over the last two years.

Steady growth in key brands such as Candid (dermatology), Telma (Cardiovascular) and Ascoril (cough syrup), along with new launches, helped Glenmark grow its domestic revenues by a healthy 19 per cent to Rs 1,002 crore in FY12.

With renewed focus in the domestic market, the company added 500 medical representatives and launched 20 products in FY12. Contribution from new launches and increased productivity from the newly-recruited sales force should help Glenmark sustain growth ahead of the industry, over the next two years.

However, any adverse change in the drug pricing policy may dampen the company’s domestic growth and margins.

Other key markets

Glenmark derives over a third of its revenues from the US market with a portfolio of more than 80 generic products. Dermatology, cardiovascular and oral contraceptives (OC) are the company’s focus therapy areas in the US market. The revenues in this market stood at Rs 1,214 crore in FY12, 45 per cent higher than the previous fiscal. The company launched 12 products in the US last fiscal.

This includes authorised generic launch of Nycomed’s Cutivate lotion (dermatology) and exclusive launch of GlaxoSmithKline’s anti-malarial drug Malarone’s generic equivalent. Glenmark currently sells 10 OC products in the US and six more products are awaiting approval from the regulator. Filing for six-seven more OC products is likely to be done over the next few months.

In all, the company has 39 products pending approval in the US. This includes exclusive opportunities such as the first generic version of Locoid Lipocream (dermatology) and cholesterol lowering drug Zetia which is likely to be launched in December 2013 and December 2016 respectively. These new launches should help Glenmark sustain double-digit growth in the US market.

The company also has a fair presence in Russia and CIS countries, which account for 8 per cent of its total revenue. This remains a very profitable market for Indian companies given the low cost base (manufacturing largely done in India) and five-six times higher price realisation than in the Indian market. In addition to dermatology and respiratory products, the company has also filed for a range of cosmetic products. These are expected to be approved in the current fiscal.

Europe and Latin American countries such as Brazil, Venezuela and Argentina are the other key markets for Glenmark. They contribute 16 per cent to the company’s revenues.

With 47 filings, Glenmark is widening its presence in the active pharma ingredient (API) segment. . This currently accounts for 8 per cent of the company’s revenues.

Glenmark’s current pipeline comprises of four new chemical products and two biological products. Of these, two products have been in-licensed from global innovators. Of their indigenous pipeline of four products, two have been out-licensed to Sanofi, and one (revamilast) is a potential out-licensing candidate in the near term.

Crofelemer, which was in-licensed from Napo Pharma for treating HIV -related diarrhoea is awaiting approval from the US Food and Drug Administration. Glenmark has marketing rights for 140 emerging markets. The peak potential for the company from this product is likely to be around $80 million (Rs 408 crore). However, this opportunity may be staggered over a period of 3-5 years.

Financials

Glenmark reported consolidated revenues of Rs 4,021 crore in FY12, a 36 per cent growth over the previous fiscal. Operating margins declined to18 per cent as against 24 per cent in FY11, on account of higher R&D spend and higher wage costs. However, with the sales force productivity expected to increase in the current fiscal, margins will likely improve in FY13.

Though the company has debt of Rs 2,000 crore currently, (0.8 times its shareholder’s funds), it may gradually de-leverage over the next few years, given the expected improvement in cash flows.

Glenmark’s working capital cycle improved by 46 days to 113 days in FY12, thanks to better inventory management and prompt payment by debtors. Given the strong growth expectation in key markets such as India and the US, the overall working capital cycle for the company is likely to improve.

Risks

Glenmark has been asked to pay a penalty of $16 million (Rs 83 crore) by the US Federal Court in the litigation filed by Abbott/Sanofi, over the launch of generic Tarka by Glenmark. Glenmark has appealed against this. Potential liability in the event of an unfavourable verdict remains a risk.

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