, 2011 ACCUMULATE MEDIUM RISK PRICE Rs.320 TARGET …smartinvestor.business-standard.com/BSCMS/PDF/... · US market has led to a revival in the financials of Glenmark. We expect the

Glenmark Specialties - Domestic market to continue its growth momentum with other Semi-Regulated markets gaining momentum Glenmark’s specialty business (branded generic formulations) has a presence in India, CIS, Africa, Middle East, Asia, Latin America and Europe. We believe the company is well positioned to benefit from the strong growth in offer from the domestic market with greater sales force productivity (Current MR’s - 2700), consistent new product introductions with increasing focus in higher margin therapeutic segments like dermatology, cardiology, respiratory and oncology. It is also consolidating its position in the semi-regulated markets (CIS – Russia & Ukraine, Africa, Middle East and Asia Pacific) in order to reduce working capital intensity as well as improve margins. We thus expect Glenmark’s specialties to grow at 14.2% CAGR over the period of FY11-13E with strongest traction coming in from the domestic, Russia/CIS and LatAm business.

Glenmark Generics – US base revenue visibility (+ FTF opportunities) & ramp up in business across Europe to propel growth Glenmark’s generic business comprises US generics, Europe generics, Oncology facilities in Latin America and API manufacturing facilities in India. Its US generics business has grown at a CAGR of 40% over FY07-11, aided by a strong portfolio comprising of formulations whose manufacturing entails technical complexities - mainly oral contraceptives, dermatology and modified release products. Limited competition opportunities such as Malerone and Cutivate would further strengthen the base business going ahead. On the API front, Glenmark is shifting its focus from semi-regulated to regulated markets, owing to higher margins offered by the regulated markets. We therefore expect Glenmark’s Generics business to grow at a CAGR of 13.7% over FY11-13E.

Unmatched revenue generation potential of R&D Pipeline Despite initial setbacks in new chemical entities (NCEs), Glenmark’s R&D pipeline has started to see some traction with Crofelemer nearing commercialization, out-licensing of GRC 15300 and GBR 500 to Sanofi-Aventis. Glenmark currently has a pipe-line of 5 NCE and NBE molecules which are under various stages of clinical development. Glenmark has generated ~ $ 200 mn in out-licensing income from six deals with large partners to-date, which is unmatched by any of its peers. We believe Glenmark continues to have the best R&D pipeline in the Indian Pharma industry; however, we have not factored in any out-licensing revenue in FY13E as we believe it’s highly uncertain to gauge the same.

OUTLOOK & VALUATION Consistent growth in the domestic business coupled with niche therapy based focus in the US market has led to a revival in the financials of Glenmark. We expect the growth momentum to continue, driven by strong growth in domestic formulations, the launch of niche & FTF products in the US and continuous recovery in LatAm and other semi-regulated markets. We thereby forecast a CAGR of 14% in earnings over FY11-13E and expect an improvement in the balance sheet profile. We recommend an “ACCUMULATE” with a target price of Rs. 368 (18x FY13E EPS). Considering its past track record, we are confident of its ability to monetize its R&D pipeline however we are not assigning any value to the same.

Glenmark Pharmaceuticals Limited

Please refer to important disclosures at the end of the report For private Circulation Only.

September 13, 2011 ACCUMULATE MEDIUM RISK PRICE Rs.320 TARGET Rs.368

Pharmaceuticals – Bulk Drugs & Formulations

SHARE HOLDING (%)

Promoters 48.3

FII 6.9

FI / MF 31.9

Body Corporates 2.2

Public & Others 10.7

STOCK DATA

Reuters Code Bloomberg Code

GLEN.BO GNP IN

BSE Code NSE Symbol

532296 GLENMARK

Market Capitalization

Rs. 86,496.0 mn US$ 1922.1 mn

Shares Outstanding

270.3 mn

52 Weeks (H/L) Rs. 390/241

Avg. Daily Volume (6m)

1,17,712 Shares

Price Performance (%)

1M 3M 6M

(2) 5 8

200 Days EMA: Rs.314

Part of Classic

Please refer to important disclosures at the end of the report For private Circulation Only.

Sushil Financial Services Private Limited Member : BSEL, SEBI Regn.No. INB/F010982338 | NSEIL, SEBI Regn.No.INB/F230607435. Office : 12, Homji Street, Fort, Mumbai 400 001. Phone: +91 22 40936000 Fax: +91 22 22665758 Email : [email protected]

KEY FINANCIALS

Y/E Mar.

Revenue (Rs mn)

RPAT (Rs mn)

AEPS (Rs)

AEPS (% Ch.)

P/E (x)

ROCE (%)

ROE (%)

P/BV (x)

FY10 25120.8 3244.7 12.0 57.2 26.6 10.2 16.7 3.7

FY11 29536.1 4532.9 16.8 39.5 19.1 14.7 20.8 4.2

FY12E 36070.1 5263.4 19.5 16.1 16.4 17.0 23.3 3.4

FY13E 38325.4 5533.5 20.5 5.1 15.6 15.6 20.1 2.8

ANALYST Suneel Rao | +91 22 4093 5068 [email protected]

SALES: Devang Shah | +91 22 4093 6060/62

[email protected]

Initiating Coverage (Detailed Report)

STRENGTH: Strong portfolio of Niche products, Sound track record of out-licensing R&D

molecules, rich NCE research pipeline WEAKNESS: High working capital, absence of strong

brands in domestic market. OPPORTUNITIES: Foray into newer markets, new out-

licensing deals, FTF launches. THREAT: Exchange rate volatility, Negative data flows on R&D pipeline, Unfavorable final court verdict on generic Tarka.

September 13, 2011

2

Glenmark Pharmaceuticals Ltd.

Glenmark Pharma Limited (FY11)

Glenmark Specialties (57.0 %)

India (28.6%)

LatAm (6.5%)

Semi-Regulated Markets (13.8%)

Eastern Europe (5.2%)

Outlicensing Revenue (3.0%)

Glenmark Generics (43.0 %)

US Generics (28.3%)

Western Europe (1.8%)

Oncology (1.4%)

API (11.3%)

• Manufacturing and marketing of branded formulations in emerging economies of India, Latin America, Central Eastern Europe and semi- regulated markets of Africa/Asia/CIS.

• Covers several product segments such as dermatology, anti-infective, respiratory, cardiac, diabetes, gynecology, CNS, and oncology.

Glenmark

Specialties

• Comprises US generics, Europe generics, oncology business in Latin America and API business.

• Focuses on niche segments of Dermatology, Hormones, Controlled substances, Oncology and Modified Release products.

Glenmark

Generics

COMPANY OVERVIEW Incorporated in 1977, Glenmark Pharmaceuticals Ltd. (Glenmark) is a research-driven, global, integrated pharmaceutical company based in India. It has operations stretching across 95 countries, which it serves through its subsidiaries. Glenmark is also a leading player in the discovery of new molecules, both NCEs (new chemical entity) and NBEs (new biological entity) with eight molecules in various stages of clinical development. Glenmark mainly operates through two divisions namely: A detailed revenue breakup of the company for FY11:

Source: Company, Sushil Finance

September 13, 2011

3


0

1000

2000

3000

4000

5000

6000

7000

8000

9000

India LatAM ROW EU

Glenmark Specialties Business

(Excl Out-Licensing Income)

FY07 FY08 FY09 FY10 FY11

CAGR (07-11)

of 18.5%

CAGR (07-11)

of 13.5%

CAGR (07-11)

of 21.2%

CAGR (08-11)

of 60.6%

53%

12%

25%

10%

Specialties Division Revenue Breakup FY11

India LatAM ROW EU

Glenmark Specialties The Specialty division of Glenmark takes care of its Branded generics business and new drug discovery. This business focuses on building the brands and generating prescriptions. It has a long term vision of development and marketing of novel drugs.

Formulation Business: The formulation business, serving across India, Latin America, Central Eastern Europe and semi regulated markets of Africa/Asia/CIS, focuses on therapeutic areas viz. dermatology, anti-infectives, respiratory, cardiac, diabetes, gynecology, CNS and oncology. GPL has grown at CAGR of 21.5% over the past 5 years.


Glenmark’s Specialty business contributes 54% to overall revenues (FY11) with the major contributor being domestic formulations accounting for 53% of specialties business. While the Indian specialty business is highly profitable (high margins, low capital intensity), operations in the semi-regulated markets have been sub optimal in scale and impacted by high working capital (high inventories and receivables).

New Drug Discovery: The drug discovery business is primarily focused in the areas of inflammation [asthma/COPD, rheumatoid arthritis etc.] and pain [neuropathic pain and inflammatory pain]. Glenmark has a robust pipeline of 13 molecules in various stages of preclinical & clinical development. Of these, eight molecules are in clinical trials. Being a leading player in the area of drug discovery, Glenmark has three Research & Development facilities dedicated primarily to drug discovery. In addition, the company has a R&D facility for formulations development & Novel Drug Delivery Systems (NDDS).

Source: Annual Report

September 13, 2011

4


Facility Focus on

R&D centre at Navi Mumbai, India

Discovering New Chemical Entities (NCEs) and taking them till the stage of Clinical development.

R&D centre at Neuchatel, Switzerland

New Biologic Entity (NBE) research.

R&D centre at Oxford, United Kingdom

Molecules in clinical development both NCEs and NBEs.

R&D centre at Sinnar, India Developing Specialty/ Branded formulations for global markets.

R&D centre at Taloji, India Developing API and generic formulations for global markets.

Glenmark has focused on the strategy of out-licensing its molecules in clinical development to large multinational pharmaceutical organizations. This out-licensing strategy has been successful so far with 6 deals struck by the organization in the last 7 years collecting ~$ 200 mn as upfront and milestone payments. It is the only Indian company which has got so much revenue from R&D activities.

Compound Indication Details

Current Status Potential Peak Sales

Pre-Clinical

Phase I

Phase II

Phase III

Approval

Crofelemer Anti - Diarrheal Adult acute infectious Diarrhea

In-licensed from Napo Pharma

$ 80 mn in ROW

GRC 4039 Revamilast

Asthma COPD RA

In - House

$ 2 bn World wide

GBR 500 Crohn's Disease Multiple Sclerosis

Out-licensed to Sanofi Aventis

$ 2 bn

GRC 15300 Neuropathic Pain Osteoarthritis

Out-licensed to Sanofi Aventis

$ 2 bn World wide

GRC 17536 Neuropathic Pain Respiratory Disorders

Under discussions for licensing with potential partners

$ 2 bn

GBR 401 Lymphomas & Leukemias

$ 1 bn World wide

GBR 900 Chronic Pain

$ 1 bn World wide

GBR 600 Thrombotic Thrombocytopenic pupurea

$ 200 mn


September 13, 2011

5


0

1000

2000

3000

4000

5000

6000

7000

8000

9000

USA W Europe Oncology API

Glenmark Generics Business

FY07 FY08 FY09 FY10 FY11

CAGR (07-11)

of 39.5%

CAGR (07-11)

of 289.5%

CAGR (07-11)

of 10.9%

CAGR (08-11)

of 26.1%

66%

4%

3%

27%

Glenmark Generics Revenue Breakup FY11

USA W Europe Oncology API


Glenmark Generics GGL comprises of US generics, Europe generics, oncology business in Latin America and API business. GGL focuses on niche segments of Dermatology, Hormones, Controlled substances, Oncology and Modified Release products.

Source: Company, Sushil Finance For FY11, GGL contributed 43% of Glenmark’s revenues (incl. Out-licensing revenues) with US formulations contributing 66% of global generics revenues. GGL’s US business has a portfolio of 69 generic products with mix of oral solids, oral liquids and semi-solids. Glenmark has total 40 ANDA filing is pending with USFDA including 13 Para IV of which 7 have been settled (4 are sole first to file). In Europe, GGL has presence in UK and is looking to expand its presence in other parts of EU through mix of out-licensing and own sales. GGL also manufactures and distributes APIs across 65 countries. On the API front, it currently has 47 DMF filings for the US markets.

September 13, 2011

6


8,447 9630

10881

-

2,000

4,000

6,000

8,000

10,000

12,000

FY11 FY12E FY13E

Rs.

in M

n

India Formulation Business


INVESTMENT ARGUMENTS Glenmark Specialties - Domestic market to continue its growth momentum with other Semi-Regulated markets gaining momentum

Therapy focused strategy to bear fruits in the domestic market….. A leading contributor to the specialties business, Glenmark’s domestic formulations are highly profitable and generates strong free cash flows. We believe that the domestic business holds an important part in Glenmark's revenue profile and is also crucial for supporting investments in NCE research and growth in overseas markets. Domestic revenues have been growing ahead of the market growth rate and have registered revenue CAGR of 18.5% over the past 5 years.

Glenmark has been gaining market share in the domestic market driven by steady volume growth and new product introductions. Going ahead we believe the company will start bearing the fruits of a consious strategy adopted by them in the domestic as well as other semi-regulated markets. The strategy that Glenmark has adopted:

Concentrate on 4 key fast growing and higher margin therapeutic segments like dermatology, respiratory, cardiology and oncology wherein the company has significant expertise.

In addition, the focus woould also be on 1 or 2 additional therapeutic areas specific to the region.

The company currently has about 300 products in the domestic market and is looking to launch about 12-15 new products every year. Five of the company’s brands register in the top‐300 brands in the country. Glenmark has already launched 2 new products in the domestic market in Q1FY12. The planned expansion in new therapeutic areas has helped bolster growth with sales of new products in Q1FY12.

Glenmark currentlyhas a total field force of about 2700 medical representatives (Q1FY12) reaching to about 100,000 medical practitioners. The company has added around 800-900 MR’s in the last 12 months and are still to see the complete effect of the same in terms of increase in the domestic sales. Glenmark also plans to support revenue growth by adding between 150 and 200 people on the field each year.

We believe, Glenmark is leveraging on its expertise in core areas with therapeutic segment based portfolio expansions and with the recently added field force turning more productive, the domestic business will continue on its path of sustainable growth and witness a CAGR growth of 13.5%

over FY11-13E. Semi-Regulated Markets (SRM’s) seeing a turnaround….. Glenmark sells branded formulations in semi-regulated markets like CIS (Russia, Ukraine), Africa, Middle East and Asia Pacific. These markets cumulatively account for 25.5% of specialty business revenues and 13.8% of total revenues in FY11. Russia is the largest market in the region accounting for 45% of the SRM revenues and other key markets are

September 13, 2011

7


1,919 2399

2927

-

500

1,000

1,500

2,000

2,500

3,000

3,500

FY11 FY12E FY13E

Rs.

in M

n

LatAm Business

4,069 4680

5429

-

1,000

2,000

3,000

4,000

5,000

6,000

FY11 FY12E FY13E

Rs.

in M

n

Semi-Regulated Market Business



Ukraine, Uzbekistan and Kazakhstan. Over 35 products are being sold in segments like dermatology, respiratory, gynecology and gastroenterology.

The Semi-regulated markets have been faced with a challenging environment over the past two years with large scale de-stocking and extended credit periods impacting the working capital negatively mainly on account of high receivables. This is visible from the fact that this business only grew by a meager 5% in FY11. However, we believe the strong 43% YOY growth registered in Q1FY12 is on the back of a strong marketing push, especially in markets such as Russia that had slowed down. Glenmark plans to look at launching its formulations in the relevant newer markets, supplemented by in-licensed products as are deemed necessary to strengthen the product suite.

With the market growth picking up, restructuring exercises bearing fruit, continuous new product launches and distribution expansion, we believe this market will grow at a CAGR of 15.5% over FY11-13E. LatAm Business gaining traction….. Glenmark’s Latin American business is based out of Brazil and it remains the key country for the region, contributing to nearly 78% of LatAm revenues. Presently the company operates in 12 markets in this region. Brazil is the largest subsidiary for the region and the other key focus markets are Mexico, Peru, Venezuela and Ecuador. Its subsidiary in Brazil markets products across Latin America and Caribbean markets. Historically, the Latin American business has been tender based, however glenmark has transitioned the low margin tender based business to a sales force driven direct sales business in FY10. This effort has started to pay off in FY11 with the secondary uptake showing a healthy increase over the previous year and the

region witnessing a strong growth of 41%.

The LatAm region will continue to remain EBIDTA negative for the next 2 years as it is still in an investment phase. However, on the revenue front we expect Glenmark’s LatAm business to register a CAGR of 23.5% over the period of FY11-13E with major growth to come in from their planned increase in front end presence in the markets such as Brazil, Mexico and Venezuela and therapy focused product launches.

September 13, 2011

8


Central Eastern Europe to show a flattish trend ….. Glenmark has an established presence in Eastern European markets through the acquisition of Medicamenta in Czech Republic in FY07 followed by acquisition of 7 brands from Actavuis and Biovena in FY09. The company operates in Czech Republic, Slovakia, Poland and Romania markets with a portfolio of over 25 products in the central nervous system, cardiovascular, metabolic and respiratory segments. Glenmark's product basket has so far been focused on the CNS therapy area and it is now introducing new products in dermatology and respiratory segments. It expects to launch 4-5 new products every year. However, in view of the company management not being too optimistic of witnessing strong growth in this region and would go slow as most economies there are in a pretty bad shape, we have factored in a flattish trend over FY11-13E.

Going forward, we believe that post restructuring, the operations in semi-regulated markets are poised to scale up with the domestic business to continue on its path of sustainable growth. We forecast a CAGR growth of 14.2% over FY11-13E in the specialties business of the company.

Glenmark Generics – US revenue visibility (+ FTF opportunities) & ramp up in business across Western Europe to propel growth Glenmark Generics Limited focuses on developing, manufacturing, selling, and distribution of generics products. It is an end-to-end vertically integrated generic player with capabilities ranging from API manufacturing to front end sales in key markets. Glenmark’s generic business comprises of US generics, Europe generics, oncology facilities in Latin America and API manufacturing facilities in India. The company focuses on niche segments like dermatology, hormones, controlled substances, oncology and modified release products. For FY11, the generic business contributed 44% of Glenmark’s revenues (excl. Out-licensing revenues) with US formulations contributing 29% of overall revenues. Glenmark’s Generics business has grown at a CAGR of 13.7% over FY07-11.

US to continue to remain key international market for Glenmark….. Accounting for nearly 29% (FY11) of its total revenues, US remains a key international market for Glenmark. From a base of Rs. 2207 mn in FY07, Glenmark’s sales have grown at a CAGR of 39.5% in FY07-11 period aided by consistent new ANDA filings and FTF challenges. Glenmark’s US portfolio consists of 69 generic products authorized for distribution. It also has 40 ANDA applications pending for approval with the USFDA, in addition to 13 Para IV filings.

Niche Area Focus in ANDA Fillings

Category ANDA's Pending with USFDA

Authorized to Distribute

Total Market Size ($ mn)

Immediate Release

12 36 48 8082

Hormones 9 6 15 1180

Modified Release

3 6 9 376

Derm Products 3 18 21 364

PIV Fillings 13 0 13 7930

Controlled Substances

0 3 3 84

Total 40 69 109 18016


September 13, 2011

9


8,352 9938

11429

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

FY11 FY12E FY13E

Rs.

in M

n

US Generics Business



Glenmark's portfolio in the US market comprises of formulations whose manufacturing entails technical complexities - mainly oral contraceptives, dermatology and modified release products. As a result, these segments have limited generic competition and the price erosion is not as steep as is the case with plain vanilla generics which helps it maintain good margins.

Glenmark has 13 Para IV applications in its US generic pipeline, in which the company is likely to be the sole FTF on four products. The company has also reached settlements on key Para IV drugs like Zetia, Cutivate, Malarone and Locoid lipocream. It plans to file 18-20 ANDAs in FY12. It expects to launch seven products in US markets in Q2FY12, which includes oral contraceptives (OCs) and exclusivity product Malarone (September 2011). In the OC segment, Glenmark is planning to build a portfolio of 22-26 products in the next three to four years. So far, it has launched five products in the US market while around 10 ANDAs are waiting for approval.

We have factored in revenues to come in from the launch of Malarone in Sept 2011 and the launch of Cutivate in Apr 2012.

We believe, strong growth from products launched in FY11 and 7-10 new launches per year would lead to 17% revenue CAGR over FY11-13E. Limited competition opportunities such as Malorene and Cutivate and consistent new product launches in the OC space would

further strengthen the base business going ahead. Western Europe market – Expanding geographic footprint….. Glenmark’s European business is based out of UK and it is looking to ramp up its business across Europe. The company’s foray into the EU began with a soft launch in the UK in FY08.

The business model adopted by the company in this market involves generating revenues from majorly 3 sources:

Dossier licensing income.

Para IV fillings with sole FTF’s

Brand Name Plaintiff Market Size

($ mn) Litigation

Status Approval Status Launch Date

Zetia Schering Plough

1400 Case Settled Tentative Approval

Received December-16

Cutivate Nycomed 48 Case Settled Final March-12

Malarone GSK 65 Case Settled Final September-11

Locoid Lipocream

Triax & Astellas

38 Case Settled Awaited Q3FY13

September 13, 2011

10


543 630

725

-

100

200

300

400

500

600

700

800

FY11 FY12E FY13E

Rs.

in M

n

Europe Generics Business


Third party supplies linked to licensing Sales through front end (own).

The company is focusing on solid orals and semi-solids differentiated on the basis of ‘difficult to develop’ products or products with high entry barriers. Glenmark expanded its presence in Netherlands in FY11 through the launch of 4 products through contracts with health insurance companies. In Germany, Glenmark has already won a tender and is also exploring the non-tender route for some of its niche products. Glenmark's out-

licensing deals in EU are ramping up and it currently supplies products to several European pharmaceutical companies across 16 countries. We expect the western European market to continue to gain traction and grow at a CAGR of 15.5% over FY11-13E. Oncology – focus on getting the plant approved by USFDA….. Based out of new manufacturing facility at Buenos Aires, Argentina, this business serves as a manufacturing and distribution hub for lyophilized and liquid Injectibles oncology products across markets that Glenmark caters to. At present, the company’s presence in oncology segment is in cytotoxics, anti-hormonals and supportive therapies in over 20 countries and caters to 75% of the cancer therapy products. Glenmark set up an oncology Injectibles facility in Argentina last year with a view to launch products in the regulated markets. It is also seeking a USFDA approval for its facility in Argentina and the facility is likely to be put up for USFDA inspection in the current fiscal. However, we are building in de-growth of 7.5% CAGR over FY11-13E as we believe revenues are likely to kick start from FY14E. API – increasing focus on regulated markets….. Glenmark supplies APIs to over 65 countries from its 3 manufacturing plants located in India. Its plant in Ankleshwar is USFDA approved and currently has 47 DMF filings for the US markets. API sales accounted for 11.3% of Glenmark’s total revenues in FY11. Glenmark’s strategy going ahead is to shift its API business focus from semi-regulated to regulated markets, owing to higher margins offered by the regulated markets. With increasing shift towards regulated markets (65% of API revenues from regulated markets in FY11) and newer geographies expansion, we have factored in a CARG of 7% over FY11-13E.

Unmatched revenue generation potential of R&D Pipeline

Glenmark is one of the few Pharma companies to have successfully monetized the fruits of its innovative R&D. It has cracked an out licensing deal every year from FY05 to FY08 and after facing a few setbacks in FY 09 and FY10, it has revived the trend since FY11. We feel Glenmark’s ability to derive value from the NCE pipeline has been credible. Over the past 8 years Glenmark has received upfront and milestone payments totaling ~ $ 200 mn.

September 13, 2011

11


Source: Company, Sushil Finance The latest deal for GBR 500 with Sanofi-Aventis reinforces the company's strength in innovative R&D. The deal is also special because it is the first time that an Indian company has discovered a novel biologic worthy of being out licensed. We believe the novel R&D pipeline is very significant for Glenmark’s performance as the cash flows from these deals would allow Glenmark to fund its proprietary R&D without depending too much on its generics cash flows. Though the company has cracked the maximum deals out licensing its researched molecules, it also has had its fair share of setbacks. Four of the past six molecules out licensed by it have since been suspended. Despite this, the company has not exhausted its efforts to discover new chemical and biological entities. We believe that by out-licensing molecules to larger multinational players, companies like Glenmark were mitigating the risks involved with the process of drug discovery and enhancing their market reach. Despite initial setbacks in new chemical entities (NCEs), Glenmark’s R&D pipeline has started to see some traction with Crofelemer nearing commercialization, out-licensing of GRC 15300 and GBR 500 to Sanofi-Aventis. We believe that Crofelemer should get launched by FY14 and expects peak sales of $ 80 mn from the launch. Glenmark is fighting a legal case against Napo as the latter tried to launch Crofelemer in emerging markets via tender route in Africa. Glenmark expects the verdict to be in their favour as per the terms agreed upon in the contract. Glenmark currently has a pipe-line of 5 NCE and NBE molecules which are under various stages of clinical development. Glenmark with a proven track record is best placed to make the most of any opportunity that comes its way however, we have not factored in any out-licensing revenue in FY13E as we believe it’s highly uncertain to gauge the same. Any new out licensing deals or positive R&D data could spring a positive surprise on the stock price.

Improving balance sheet and stable return ratios Glenmark’s efforts of reducing capex and curtailing working capital towards improving its balance sheet seem to be paying off in Q1FY12 – slight improvement in net debt to Rs. 18300 mn from Rs. 19130 mn (FY11) and debtor days brought down to 125 days from 140 days in FY11 end. The company’s has earmarked Rs. 2.5 bn capex for FY12E, of which Rs. 0.46 bn was spent in Q1FY12. With the company generating sufficient cash flows (out licensing income, future FTF’s and strong base business) to fund its future capex requirement, we believe the company’s D:E ratio is likely to decline from 1.0x in FY11 to 0.7x by FY13E, thus strengthening the balance sheet. Also the company was able to restructure its high cost short term debt to bring down the interest cost visible in Q1FY12.

Molecule Out licensed

to

Out-Licensing Income Received (In $ Mn)

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

Oglemilast Forest labs 20

15

Oglemilast Teijin Pharma

7

Melogliptin Merck KGA

31

GRC 6211 Elli Lilly

45

GRC 15300 Sanofi Aventis

20 5

GBR 500 Sanofi Aventis

50

Total 20 7 31 60 0 0 20 55

September 13, 2011

12


Source: Annual Report, Sushil Finance

1.3

0.8

1.0

0.9

0.7

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

FY09 FY10 FY11 FY12E FY13E

0

5000

10000

15000

20000

25000Debt to Equity

Debt D:E Ratio

9.710.2

14.717.0

15.6

12.4

16.7

20.823.3

20.1

FY09 FY10 FY11 FY12E FY13E

0.0

5.0

10.0

15.0

20.0

25.0Stable ROE & ROCE

ROCE (%) ROE (%)

Glenmark has stable return ratios with ROE & ROCE pegged at 23.3% and 17.0% respectively for FY12E.

September 13, 2011

13


RISK & CONCERNS Launching products at risk Glenmark follows an aggressive FTF strategy and has historically launched products at risk. It recently lost a litigation battle for Tarka, which it had launched at risk, which has resulted in a potential liability capped at $ 16 mn. We believe that going forward any potential negative news flow from litigations can have repercussions on the growth and also lead to one time penalty payments + loss of revenue from the same. Unfavorable currency movements: Glenmark derives close to 65% of its total revenues from its export business to countries like US, Europe, LatAm, and emerging markets etc. Thus any appreciation in the INR against respective currencies will result in the erosion of margins. R&D pipeline risk: Glenmark is one of the few Pharma companies to have successfully monetized the fruits of its innovative R&D. Though the company has cracked the maximum deals out licensing its researched molecules, it also has had its fair share of setbacks. Since we have not factored in any value to the NCE research pipeline we believe an encouraging licensing deal could act as a positive trigger to the stock price.

OUTLOOK & VALUATION Glenmark is one company which has been successful both in innovation as well as in generics. It is one of the few Pharma companies to have successfully monetized the fruits of its innovative R&D. Glenmark is also gaining market share in the domestic market driven by therapy focused strategy, field force expansion and new product introductions. With regards to the US generics business Glenmark has been able to build a very sizeable business in a short span of time. With focus on reducing working capital intensity, Glenmark has also restructured part of the emerging market operations. Consistent growth in the domestic business coupled with niche therapy based focus in the US market has led to a revival in the financials of Glenmark. We expect the growth momentum to continue, driven by strong growth in domestic formulations, the launch of niche & FTF products in the US and continuous recovery in LatAm and other semi-regulated markets. We forecast CAGR of 14% in earnings over FY11-13E and expect an improvement in the balance sheet profile. We thereby recommend an “ACCUMULATE” with a target price of Rs.368 (18x FY13E EPS). We are confident of its ability to monetize its R&D pipeline however are not assigning any value to the same.

September 13, 2011

14


PROFIT & LOSS STATEMENT (Rs.mn)

Y/E March FY10 FY11 FY12E FY13E

Net Sales 25120.8 29536.1 36070.1 38325.4

Total Mfg expenses

8061.3 9918.3 11181.7 12072.5

R&D Exp 772.8 0.0 1370.7 1456.4

Staff Cost 3425.0 5103.0 5049.8 5173.9

Total Expenditure 18652.8 23568.0 27701.9 29702.2

PBIDT 6468.0 5968.1 8368.3 8623.2

Interest 1640.2 1565.6 1781.7 1558.0

Depreciation 1206.1 946.8 1089.8 1217.8

Other Income 217.3 1359.4 721.4 689.9

PBT incl OI 3839.0 4815.1 6218.2 6537.3

Tax 528.7 237.2 901.6 947.9

RPAT 3310.3 4577.9 5316.5 5589.4

Extraordinary Exp./ (Income)

-65.6 -45.0 -53.2 -55.9

RPAT after MI 3244.7 4532.9 5263.4 5533.5

BALANCE SHEET STATEMENT (Rs.mn)

As on 31st March FY10 FY11 FY12E FY13E

Share Capital 269.8 270.3 270.3 270.3

Reserves & Surplus 23282.5 20102.1 24957.3 30082.6

Net Worth 23552.3 20372.4 25227.6 30352.9

Secured Loans 2414.1 3414.2 6053.2 4071.0

Unsecured Loans 16279.8 17702.3 17702.3 16702.3

Total Loan funds 18693.9 21116.5 23755.5 20773.3

Deferred Tax 1275.0 1476.3 1476.3 1476.3

Capital Employed 43651 43232 50780 52979

Net Block 17873.1 20615.5 22025.7 23307.9

Cap. WIP 6007.7 1507.7 1507.7 800.0

Investments 181.2 181.2 181.2 181.2

Sundry Debtors 10782.8 11308.1 12846.9 14175.1

Cash & Bank Bal 1070.2 1986.3 3117.2 2994.8

Loans & Advances 5273.1 4751.2 5929.3 6300.1

Inventory 7084.6 8070.1 7965.1 8599.6

Curr Liab & Prov 5186.2 7745.7 5351.2 5937.8

Net Current Assets 19024.5 18370.0 24507.2 26131.8

Total Assets 43651 43232 50780 52979

FINANCIAL RATIO STATEMENT


Growth (%)

Net Sales 18.4 17.6 22.1 6.3

EBITDA 33.8 -7.7 40.2 3.0

Adjusted Net Profit 71.1 38.3 16.1 5.1

Profitability (%)

EBIDTA Margin (%) 25.7 20.2 23.2 22.5

Net Profit Margin (%) 12.9 15.3 14.6 14.4

ROCE (%) 10.2 14.7 17.0 15.6

ROE (%) 16.7 20.8 23.3 20.1

Per Share Data (Rs.)

EPS (Rs.) 12.0 16.8 19.5 20.5

CEPS (Rs.) 17.0 19.3 23.5 25.0

BVPS (Rs) 87.3 75.4 93.3 112.3

Valuation

PER (x) 26.6 19.1 16.4 15.6

PEG (x) 0.5 0.5 1.0 3.0

P/BV (x) 3.7 4.2 3.4 2.8

EV/EBITDA (x) 16.1 17.7 12.8 12.1

EV/Net Sales (x) 4.1 3.6 3.0 2.7

Turnover

Debtor Days 148 136.5 130.0 135.0

Creditor Days 145 193.8 165.0 170.0

Gearing Ratio

D/E 0.8 1.0 0.9 0.7

Source: Company, Sushil Finance Research Estimates

CASH FLOW STATEMENT (Rs.mn)


Profit before tax & Extraordinary Items

3839.0 4815.1 6218.2 6537.3

Depreciation & Amortization

1206.1 946.8 1089.8 1217.8

Chg. in Working Capital -2441.0 1570.6 -5006.4 -1746.9

Cash Flow from Operating

2249.7 5396.6 1400.0 5060.3

(Incr)/ Decr in Gross PP&E

-3369.6 -3689.2 -2500.0 -2500.0

(Incr)/Decr In Intangibles

0.0 0.0 0.0 0.0

(Incr)/Decr In WIP -553.6 4500.0 0.0 707.7

Cash Flow from Investing

-3970.9 809.8 -2500.0 -1792.3

(Decr)/Incr in Debt -2249.6 2422.6 2639.0 -2982.2

(Decr)/Incr in Share Capital

19.3 0.5 0.0 0.0

Dividend -126.0 -408.2 -408.2 -408.2

Cash Flow from Financing

2076.5 -5290.3 2230.9 -3390.3

Cash at the End of the Year

1070.2 1986.3 3117.1 2994.8

September 13, 2011

15


Rating Scale This is a guide to the rating system used by our Institutional Research Team. Our rating system comprises of six rating categories, with a corresponding risk rating.

Risk Rating

Risk Description Predictability of Earnings / Dividends; Price Volatility

Low Risk High predictability / Low volatility

Medium Risk Moderate predictability / volatility

High Risk Low predictability / High volatility

Total Expected Return Matrix

Rating Low Risk Medium Risk High Risk

Buy Over 15 % Over 20% Over 25%

Accumulate 10 % to 15 % 15% to 20% 20% to 25%

Hold 0% to 10 % 0% to 15% 0% to 20%

Sell Negative Returns Negative Returns Negative Returns

Neutral Not Applicable Not Applicable Not Applicable

Not Rated Not Applicable Not Applicable Not Applicable

Please Note

Recommendations with “Neutral” Rating imply reversal of our earlier opinion (i.e. Book Profits / Losses).

** Indicates that the stock is illiquid With a view to combat the higher acquisition cost for illiquid stocks, we have enhanced our return criteria for such stocks by five percentage points.

Stock Review Reports: These are Soft coverage’s on companies where Management access is difficult or Market capitalization is below Rs. 2000 mn. Views and recommendation on such companies may not necessarily be based on management meeting but may be based on the publicly available information and/or attending Company AGMs. Hence Stock Reviews may be just one-time coverage’s with an occasional Update, wherever possible.

Additional information with respect to any securities referred to herein will be available upon request. This report is prepared for the exclusive use of Sushil Group clients only and should not be reproduced, re-circulated, published in any media, website or otherwise, in any form or manner, in part or as a whole, without the express consent in writing of Sushil Financial Services Private Limited. Any unauthorized use, disclosure or public dissemination of information contained herein is prohibited. This report is to be used only by the original recipient to whom it is sent.

This is for private circulation only and the said document does not constitute an offer to buy or sell any securities mentioned herein. While utmost care has been taken in preparing the above, we claim no responsibility for its accuracy. We shall not be liable for any direct or indirect losses arising from the use thereof and the investors are requested to use the information contained herein at their own risk.

This report has been prepared for information purposes only and is not a solicitation, or an offer, to buy or sell any security. It does not purport to be a complete description of the securities, markets or developments referred to in the material. The information, on which the report is based, has been obtained from sources, which we believe to be reliable, but we have not independently verified such information and we do not guarantee that it is accurate or complete. All expressions of opinion are subject to change without notice.

Sushil Financial Services Private Limited and its connected companies, and their respective directors, officers and employees (to be collectively known as SFSPL), may, from time to time, have a long or short position in the securities mentioned and may sell or buy such securities. SFSPL may act upon or make use of information contained herein prior to the publication thereof.

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