Glenmark Pharmaceuticals (GLEPHA) | 539content.icicidirect.com/mailimages/IDirect... · · 2018-02-12ICICI Securities Ltd | Page Retail Equity Research 3 Company Analysis Incorporated

February 12, 2018

ICICI Securities Ltd | Retail Equity Research

Result Update

Margin contraction intensifies on US pricing

Revenues declined 13% YoY to | 2204 crore (I-direct estimate: | 2224

crore). The 40% YoY de-growth in the US to | 736 crore (I-direct

estimate: | 719 crore) was mainly due to high gZetia exclusivity base

in Q3FY17. India business grew 12% YoY to | 579 crore (I-direct

estimate: | 672 crore) and 15% YoY growth in Europe to | 225 crore

(I-direct estimate: | 235 crore)

EBITDA margins fell 1554 bps YoY to 14.6% (I-direct estimate: 19%)

due to lower gross margins (64.5% in Q3FY18 vs. 76.4% in Q3FY17).

EBITDA fell 58% YoY to | 323 crore (I-direct estimate: | 423 crore)

Adjusted net profit declined 78% YoY to | 105 crore on a weak

operational performance and lower other income

US growth now mainly dependant on new launches

US generics comprise ~44% of total revenues and have grown at a CAGR

of ~17% in FY13-17. Total USFDA filings as on date are 188. So far, the

company has received approvals for 130. Out of the 58 pending ANDAs,

~26 are Para IV applications. Key therapies in the US, going forward, will

be oncology, dermatology and respiratory. The company expects to file

20-25 ANDAs. We expect US sales to remain subdued in FY17-20E to

| 2907 (CAGR -8%), mainly due to higher base, delay in product launches

and acute pricing pressure in base business.

Targeting specific therapies in IPM

Glenmark is ranked fourteenth in domestic formulations with market

share of 2.3%. It is a market leader in dermatology and improving its

presence in therapies like respiratory, CVS, anti-infectives and even anti-

diabetics. It has defied industry growth consistently for the last 60 months

by continuous churning of the portfolio. In FY17, Glenmark’s growth was

14% vis-à-vis IPM growth of 9% as per IMS MAT. We expect India sales

to grow at 12% CAGR in FY17-20E to | 3201 crore.

Clear roadmap but headwinds in US unlikely to subside anytime soon

The R&D setback in 2008-10 has actually benefited the company as the

focus shifted to more productive segments like the US generics, India and

Europe. The changed focus has improved the leverage situation as the

debt/EBITDA has improved from a high of 4.6x in FY09 to 1.8x in FY17.

With a 10-year roadmap, the company has a well thought out strategy in

place encompassing only three core therapy areas oncology,

dermatology and respiratory across geographies and covering both

specialty and generics. However, continued subdued growth in the US

and volatile growth in ex-India/US geographies is likely to impact near

term free cash flows.

US pricing pressure, gearing to keep sentiments subdued

Glenmark’s management still expects ~13% US base business price

erosion for the next four to five quarters despite hints of some easing up

in the pricing scenario by larger peers. Similarly, from the 61 pending

approvals in the US, we do not expect any meaningful launches for the

company in the near term. Ex-US, the company has guided for 15%+

growth mainly due to new launches and stabilization of currency in

emerging markets. However, historically, ex-US growth is always volatile.

There is little solace on the gearings front (1.1x of D/E in FY17) as well.

These are some of the main concerns that are likely to weigh on the

sentiments for some time. We arrive at our new target price of | 535

based on 14x FY20E EPS of | 38.2.

Rating matrix

Rating : Hold

Target : | 535

Target Period : 12-15 months

Potential Upside : -1%

What’s Changed?

Target Changed from | 730 to | 535

EPS FY18E Changed from | 36.8 to | 33.4



Rating Unchanged

Quarterly Performance

Q3FY18 Q3FY17 YoY (%) Q2FY18 QoQ (%)

Revenue 2,203.7 2,535.0 -13.1 2,256.6 -2.3

EBITDA 322.7 765.0 -57.8 388.4 -16.9

EBITDA (%) 14.6 30.2 -1,553.5 17.2 -256.8

Adj. Net Profit 104.7 477.0 -78.0 214.1 -51.1

Key Financials

(| Crore) FY17 FY18E FY19E FY20E

Revenues 9185.7 9161.0 9497.9 10343.2

EBITDA 2036.7 1824.0 1709.6 1965.2

Adjusted PAT 1189.8 941.8 887.5 1075.7

EPS (|) 42.2 33.4 31.5 38.2

Valuation summary

FY17 FY18E FY19E FY20E

PE (x) 13.7 16.1 17.1 14.1

Target PE (x) 12.7 16.0 17.0 14.0

EV to EBITDA (x) 9.2 10.1 10.6 9.1

Price to book (x) 3.4 2.8 2.4 2.1

RoNW (%) 26.5 17.5 14.3 14.9

RoCE (%) 19.5 16.2 14.3 15.5

Stock data

Particular

Market Capitalisation

Debt (FY17)

Cash (FY17)

EV

52 week H/L (|) 968/524

Equity capital

Face value | 1

| 18855 crore

Amount

| 15188 crore

| 4724 crore

| 1056 crore

| 28.2 crore

Price performance (%)

1M 3M 6M 1Y

Glenmark Pharma -8.6 -17.4 -13.3 -9.8

Divi's Labs -5.9 1.2 66.0 38.8

Cadila Healthcare -9.2 -5.3 10.5 -24.8

Glenmark Pharmaceuticals (GLEPHA) | 539

Research Analyst

Siddhant Khandekar

[email protected]

Mitesh Shah

[email protected]

Harshal Mehta

[email protected]

ICICI Securities Ltd | Retail Equity Research Page 2

Variance analysis

Q3FY18 Q3FY18E Q3FY17 Q2FY18 YoY (%) QoQ (%) Comments

Revenue 2,203.7 2,224.2 2,535.0 2,256.6 -13.1 -2.3 YoY decline mainly due to high base of gZetia exclusivity

Raw Material Expenses 781.6 689.5 599.0 751.3 30.5 4.0 YoY increase mainly due to adverse product mix

Employee Expenses 465.9 467.1 401.7 557.2 16.0 -16.4

Other Expenditure 633.5 645.0 769.3 559.7 -17.7 13.2 Included forex loss of | 48 crore

EBITDA 322.7 422.6 765.0 388.4 -57.8 -16.9

EBITDA (%) 14.6 19.0 30.2 17.2 -1554 bps -257 bps YoY decline and miss vis-à-vis I-direct estimates was mainly due to high base

of gZetia exclusivity, adverse product mix and forex loss

Interest 70.5 69.8 61.7 69.8 14.1 0.9

Depreciation 75.4 75.2 62.5 75.2 20.6 0.2

Other Income -23.2 11.1 14.6 29.7 -259.0 -177.9

PBT before EO & Forex 153.7 288.6 655.3 273.1 -76.5 -43.7

PBT 153.7 288.6 655.3 273.1 -76.5 -43.7

Tax 48.9 77.9 178.2 58.9 -72.5 -17.0 Included one-off deferred tax pertaining to US was |5.2 crore

PAT before MI 104.7 210.7 477.1 214.1 -78.0 -51.1

Adj. Net Profit 104.7 210.7 477.0 214.1 -78.0 -51.1 YoY decline and miss vis-à-vis I-direct estimates was on account of a subdued

operational performance

Key Metrics

US 735.9 719.4 1,230.8 727.1 -40.2 1.2 YoY decline mainly due to high base of gZetia exclusivity

Europe 224.8 234.9 195.7 200.0 14.8 12.4 YoY strong growth was mainly due to geographical expansion and new

product launches

India 578.5 671.9 516.9 710.7 11.9 -18.6 Adjusting for GST impact the like-to-like growth was 14.5% YoY

Latin America 89.8 104.2 94.7 104.7 -5.2 -14.2 YoY decline and miss vis-à-vis I-Direct estimates was due to weak

performance of the Brazilian subsidiary

RoW markets 322.1 263.7 251.1 252.1 28.3 27.8 Registered better-than-expected growth in most of the geogrophies

API 231.6 201.7 192.1 236.6 20.6 -2.1

Source: Company, ICICIdirect.com Research

Change in estimates

(| Crore) Old New % Change Old New % Change

Revenue 9,282.3 9,161.0 -1.3 9,852.8 9,497.9 -3.6

EBITDA 1,906.0 1,824.0 -4.3 1,897.4 1,709.6 -9.9

EBITDA Margin (%) 20.5 19.9 -62 bps 19.3 18.0 -126 bps Changed mainly due to change in product mix

PAT 1,035.5 941.8 -9.0 1,039.3 887.5 -14.6

EPS (|) 36.8 33.4 -9.0 36.9 31.5 -14.6 Decline mainly due to a below expected operational performance and increased

financial expenses due to a delay in debt repayment

FY18E FY19E


Assumptions

Comments

(| crore) FY16 FY17 FY18E FY19E FY18E FY19E

US 2,420.4 3,700.7 3,236.1 2,849.8 3,307.5 3,110.0 Reduced mainly due to higher-than-expected price erosion in base business

Europe 717.1 710.1 851.1 978.8 872.7 1,047.2 Redused as per management guidance

India 2,101.8 2,303.8 2,551.7 2,858.0 2,645.2 2,962.6

Latin America 749.5 518.1 406.4 459.7 420.7 475.5

RoW markets 903.3 988.8 1,133.0 1,302.9 1,074.5 1,235.7

API 668.3 809.4 882.7 926.9 852.7 895.4

Current Earlier



Company Analysis

Incorporated in 1977, Glenmark was never a mass-market player with a

clear focus on niche areas like dermatology, respiratory and cardiology.

The company was one of the few Indian players (like Dr Reddy’s) to

identify the importance of dedicated R&D efforts in the nineties. Post its

maiden IPO in 2000, the company started ramping up the API business

via small acquisitions. In 2005, it struck its first out-licensing R&D seal with

US based Forest Laboratories for COPD, asthma molecule with

Oglemilast. Similar R&D deals were struck with innovator companies such

as Eli Lily and Merck KGaA (Germany). It received a substantial amount in

the nature of upfront – milestone payments.

However, it received a setback in most deals, one after another in 2007-

09, as clients were unsatisfied with the progress or uninterested in

pursuing the same any further due to changed priorities or budgetary

constraints. This had hit the company hard during that period as unlike

other Indian players, which hived off the risky R&D ventures into separate

companies to protect the core balance sheet, Glenmark hived off the

generic business. Its balance sheet got stretched with huge debts.

However, post the R&D debacle, the company refocused on the generics

business, especially in the US and Indian formulations putting R&D on the

backburner. The change has worked going by the performance in the last

two or three years as the strong traction in the US, backed by forays into

niche areas such as oral contraceptives and dermatology, robust growth

in Indian formulations and strong tractions from RoW and LatAm markets

have improved the balance sheet and operating cash flows significantly.

The R&D deals are still active but the focus on innovative R&D and generic

R&D is almost equal. The company has almost fully recovered the amount

spent on innovative R&D, which is almost US$200 million in the last nine

years. We expect US sales to remain subdued in FY17-20E to | 2907

(CAGR: 8%), mainly due to higher base, delay in product launches and

acute pricing pressure in base business. However, ex-US other

geographies have started showing greater traction. The company also

remains committed to API exports. We expect revenues to grow at a

CAGR of 4% to | 10343 crore in FY17-20E.

Exhibit 1: Revenues to grow at CAGR of 7% in FY17-20E

5013.7

6007.3

6644.8

7649.6

9185.7 9161.09497.9

10343.2

0

2000

4000

6000

8000

10000

12000

FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E

(|

crore)

Revenues


Glenmark has reclassified it operations into six categories - India, US,

Europe, Latin America, RoW markets and APIs. Earlier, the classification

was on the basis of - 1) specialty businesses and 2) generics businesses.

12.9% CAGR

4.0% CAGR


India (26% of overall sales) – In India, it operates through over 20

divisions with focus on dermatology, cardiology, respiratory and anti-

infectives among all. The company markets over 400 products in India. As

per AIOCD MAT September, 2017, Glenmark ranks thirteenth in IPM with

a market share of 2.3%. Among therapies, it ranks first in dermatology,

fifth in respiratory and seventh in cardiology. The current MR strength of

the company is ~3200 (FY17). The acute: chronic: sub-chronic ratio for

Glenmark is 45: 30: 25.

Exhibit 2: India business major growth driver…

1309.6

1510.5

1749.0

2101.8

2303.8

2551.7

2858.0

3200.9

0

1000

2000

3000

4000


(|

crore)

India


The US (44% of overall sales) – US generics comprise ~44% of total

revenues and have grown at a CAGR of ~17% in FY13-17. Total USFDA

filings as on date are 188. So far, the company has received approval for

130. Out of the 58 pending ANDAs, ~26 are Para IV applications. Key

therapies in the US, going forward, will be oncology, dermatology and

respiratory. The company expects to file 20-25 ANDAs and launch 10-15

ANDAs annually in the US. We expect US sales to remain subdued in

FY17-20E to | 2907 (CAGR -8%), mainly due to higher base, delay in

product launches and acute pricing pressure in base business.

Exhibit 3: US scenario to show subdued growth on the back of higher price erosion

1688.7

2027.1 2039.8

2420.4

3700.7

3236.1

2849.8 2906.8

0

1000

2000

3000

4000

5000


(|

crore)

US


The drug discovery business is focusing on areas of inflammation

(asthma/COPD, rheumatoid arthritis etc), metabolic disorders (diabetes,

obesity, etc) and pain (neuropathic pain and inflammatory pain).

Glenmark has a pipeline of seven molecules – two NCEs and five NBEs in

various stages of preclinical and preclinical development. Of these, five

14.3% CAGR

11.6% CAGR

17% CAGR

-7.7% CAGR


molecules are in clinical trials. Glenmark has been following a strategy of

out-licensing research-staged molecules in clinical development to MNCs.

So far, Glenmark has struck seven deals in the last nine years booking

~US$200 million as upfront and milestone payments.

Exhibit 4: Higher R&D spends here to stay….

387.0

538.6

626.5

766.0

1089.01049.4

1139.7

1241.2

7.7

9.09.4

10.0

11.9 11.5 12.0 12.0

0

200

400

600

800

1000

1200

1400

1600


(|

crore)

0

2

4

6

8

10

12

(%

)

Recurring R&D Expenditure R & D as % of Sales


Exhibit 5: Margins remain strong despite higher R&D spend

1011.4

1310.41225.2

1437.1

2036.7

1824.01709.6

1965.2

20.2

21.8

18.4 18.8

22.2

19.9

18.019.0

0

500

1000

1500

2000

2500

3000

3500


(|

crore)

0

5

10

15

20

25

(%

)

EBITDA EBITDA Margins (%)


Exhibit 6: Net profit to de-grow at CAGR of 1% in FY17-20E

623.0

542.6

463.8

1108.8

941.8

887.5

1075.7

743.2

0

200

400

600

800

1000

1200


(|

crore)

Net Profit



Exhibit 7: Return ratios to improve, going ahead…

15.5

16.9

13.3

15.7

19.5

16.2

25.5

21.720.5

17.5

15.5

22.4

26.5

14.9

0

5

10

15

20

25

30


(%

)

RoCE (%) RoNW (%)


Exhibit 8: Trends in quarterly financials

(| Crore) Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 YoY (%) QoQ (%)

Total Operating Income 1701.3 1775.8 1647.7 1874.6 1778.3 2281.3 1969.4 2224.1 2535.0 2457.2 2363.0 2256.6 2203.7 -13.1 -2.3

Raw Material Expenses 556.0 381.8 484.5 549.4 513.3 743.9 623.6 614.8 599.0 776.9 721.5 751.3 781.6 30.5 4.0

% of revenue 32.7 21.5 29.4 29.3 28.9 32.6 31.7 27.6 23.6 31.6 30.5 33.3 35.5

Gross Profit 1145.3 1394.0 1163.3 1325.2 1265.0 1537.3 1345.8 1609.4 1936.0 1680.2 1641.6 1505.3 1422.1 -26.5 -5.5

Gross Profit Margin (%) 67.3 78.5 70.6 70.7 71.1 67.4 68.3 72.4 76.4 68.4 69.5 66.7 64.5 -1184 bps -218 bps

Employee Expenses 316.5 254.2 286.3 398.4 345.1 348.2 372.0 482.4 401.7 384.7 384.4 557.2 465.9 16.0 -16.4

% of revenue 18.6 14.3 17.4 21.3 19.4 15.3 18.9 21.7 15.8 15.7 16.3 24.7 21.1

Other Manufacturing Expenses563.1 858.4 517.7 524.9 549.3 886.8 594.7 678.2 769.3 851.7 679.7 559.7 633.5 -17.7 13.2

% of revenue 33.1 48.3 31.4 28.0 30.9 38.9 30.2 30.5 30.3 34.7 28.8 24.8 28.7

Total Expenditure 1435.6 1494.4 1288.4 1472.8 1407.7 1978.9 1590.3 1775.3 1770.0 2013.3 1785.6 1868.2 1881.0 6.3 0.7

% of revenue 84.4 84.2 78.2 78.6 79.2 86.7 80.8 79.8 69.8 81.9 75.6 82.8 85.4

EBITDA 265.7 281.4 359.3 401.9 370.6 302.4 379.1 448.8 765.0 443.8 577.5 388.4 322.7 -57.8 -16.9

EBITDA Margins (%) 15.6 15.8 21.8 21.4 20.8 13.3 19.2 20.2 30.2 18.1 24.4 17.2 14.6 -1554 bps -257 bps

Depreciation 65.5 64.5 65.4 63.4 51.5 58.4 64.2 68.7 62.5 68.9 77.7 75.2 75.4 20.6 0.2

Interest 51.3 39.7 41.9 42.6 46.9 47.5 43.0 62.9 61.7 69.7 70.9 69.8 70.5 14.1 0.9

Other Income 2.1 0.3 5.4 0.8 2.1 11.7 75.9 -1.8 14.6 -51.3 15.3 29.7 -23.2 -259.0 -177.9

Forex & EO 0.0 -187.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -80.9 0.0 0.0 0.0

PBT 151.0 -9.5 257.4 296.7 274.4 208.2 347.7 315.4 655.3 173.0 444.2 273.1 153.7 -76.5 -43.7

Total Tax 36.3 -20.1 74.5 96.2 78.3 59.4 120.9 91.8 178.2 -10.7 110.8 58.9 48.9 -72.5 -17.0

Tax rate (%) 24.0 211.5 28.9 32.4 28.5 28.5 34.8 29.1 27.2 -6.2 24.9 21.6 31.8 465 bps 1026 bps

PAT 114.8 10.6 182.9 200.4 196.1 148.7 226.8 223.6 477.1 183.8 333.4 214.1 104.7 -78.0 -51.1

Minority Interest 0.0 0.0 0.0 0.0 0.0 -0.1 0.0 0.0 0.1 0.0 0.0 0.0 0.0 NA NA

PAT after MI 114.8 10.6 182.9 200.4 196.2 148.8 226.8 223.6 477.0 183.8 333.4 214.1 104.7 -78.0 -51.1

EPS (|) 4.1 0.4 6.5 7.1 7.0 5.3 8.1 7.9 16.9 6.5 11.8 7.6 3.7 -78.0 -51.1



SWOT Analysis

Strengths - Prudent geographical mix covering high opportunity

emerging markets as well as developed markets. Presence in niche

therapies in the US such as oral contraceptives, dermatology, which is

relatively less crowded. Time tested R&D focused business model with a

portfolio of Innovative products. Well placed to monetise the R&D pipeline

in with product in various stages of completion

Weakness - High debt level, presence of substantial intangibles on the

balance sheet. Higher R&D spends likely to put pressure on margins

Opportunities - In the US generics space, a lot of opportunities are

panning out in the oral contraceptives and respiratory space

Industry specific threats - Increased USFDA scrutiny across the globe

regarding cGMP issues, pricing pressure due to client consolidation in the

US, pricing probe by the Department of Justice (DoJ) in the US and

proposed tightening by the new regime by adapting to the bidding

process

Company specific threat: Currency volatility in LatAm and RoW markets


Conference call highlights

The company has reported positive results of Ryaltris (GSP 301)

Phase 3 safety trial in perennial allergic rhinitis. Glenmark plans to

submit its first New Drug Application (NDA) to the USFDA for

Ryaltris in the first half of CY18. Peak sales for GSP 301 is in the

range of US$ 80-100 million

Glenmark’s domestic OTC business driven by its 3 major brands

Candid, VWash Plus and Scalpe+. According to IMS data, Candid

Powder has jumped 2.3x in sales, within three years, post OTC

promotion. All three brands have a dominant market share in

each of its operating markets as per IMS ORG data consistently

for last couple of years.

Glenmark has closed the centralised registration procedure for

generic Seretide Accuhaler in the Nordic region. It is the

company’s first inhaled respiratory product approval in Europe.

The commercialisation of the product would depend on national

approval as well as substitution and pricing approvals

As of end of Q3FY18, gross debt was at | 4638 crore. Cash was at

| 3603 crore

The management expects ~13% price erosion in the US base

business in next five quarters

The company expects Phase 1 outcome for Xolair (Omalizumab,

oncology) biosimilar in the US. The company plans to approach

USFDA for PII/III study in Q4FY19

Guided for 11.5-12% of R&D in FY18 and 12% of R&D in FY19.

From total R&D budget the company spend ~8% R&D as

percentage of sales in specialty and innovative pipeline

The company plans to file NuvaRing (gynaecology) and gConcerta

(CVS) in FY19 in the US

The company expects multiple out-licensing deals in the next 12-

15 months

The management expects 15%+ revenue growth in ex-US

geographies in FY19 with improvement in margins

The company has target action date (TAD) on gWelchol and

gVoltaren gel (dermatology) in the US

The management expects double digit margins with strong

growth in LatAm from FY19 onwards due to new launches

The company responded to observations from the USFDA on the

Baddi facility

The company is working with three consulting firms to reduce

overall cost

Glenmark is the first company to receive substitution status on

gSalmax DPI inhalation in Norway. Europe market size of Salmax

is US$700-800 million

Market Share: Domestic

MAT Dec 2017 (%) MAT Dec 2016 (%)

Cardiac 4.2 4.0

Respiratory 4.7 4.4

Anti Diabetic 1.6 1.8

Derma 9.2 9.2

Source: IMS, Company, ICICIdirect.com Research


Exhibit 9: Facilities

Location Segment Regulatory Approvals Type

Nashik, India Formulations WHO GMP, ANVISA, NDA-Uganda, MOH-Nigeria, TFDA-Tanzania, MOH-Ethopia, MOH,

Congo, MCC-SA, MOH-Oman, MOH-Ukraine, INVIMA-Colombia

solid & liquid orals, external creams &

powders

Baddi, India Formulations USFDA, WHO GMP, ANVISA Brazil, UKMHRA, MCC SA, TGA Australia, NDA Uganda,

Ukraine GMP, DDA Nepal, TPD Canada, FDA Ghana, CHMP Kenya

solid orals, semi-solid and liquid orals as well

as external preparations like lotions, creams,

etc

Nalagarh, India Formulations ANVISA (Brazil), UGANDA, WHO GMP, Local FDA Liquid, Ointment/Cream, and Lotion

Sikkim, India Formulations Oral solids (Tablets and Capsules) Ointments,

Creams, Lotions and Liquids

Vysoke Myto, Czech Formulations Manufacturing licence for medicinal products (issued by SUKL), Distribution licence for

medicinal products (issued by SUKL), Certificate of GMP Compliance of Manufacturer

(issued by SUKL), Certificate of GMP Compliance of a Manufacturer (issued by USKVBL)

solid-orals and semi-solids (ointments)

Sao Paulo, Brazil Formulations WHO-GMP, ANVISA Brazil

Bardez, Goa Formulations USFDA, TPD (Canada), MCC (South Africa), WHO-GMP, ANVISA (Brazil), MHRA (UK),

ISO 14001:2004

Oral Solids, Semi Solids & Hormones

Solan, HP Formulations

Pithampur, Indore Formulations USFDA, UKMHRA solid oraldosage forms

Buenos Aires, Argentina Formulations cytotoxics, anti hormonals,

lyophilizedinjectables and supportive

therapies

Aurangabad, Maharashtra Formulations

Monroe, USA Formulations

Ankleshwar, Bharuch, Gujarat API WHO GMP, USFDA, MHRA - UK, MHRA - Romania and EMEA

Solapur, Maharashtra API

Pune Maharashtra API

Bharuch, Gujarat API



Valuation

Glenmark’s management still expects ~13% US base business price

erosion for the next four to five quarters despite hints of some easing up

in the pricing scenario by larger peers. Similarly, from the 61 pending

approvals in the US, we do not expect any meaningful launches for the

company in the near term. Ex-US, the company has guided for 15%+

growth mainly due to new launches and stabilisation of the currency in

emerging markets. However, historically, ex-US growth is always volatile.

There is little solace on the gearings front (1.1x of D/E in FY17) as well.

These are some of the main concerns, which are likely to weigh on the

sentiments for some time. We arrive at our new target price of | 535

based on 14x FY20E EPS of | 38.2.

Exhibit 10: One year forward PE

0.0

200.0

400.0

600.0

800.0

1000.0

1200.0

1400.0

2/12/201

1

8/12/201

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2/12/201

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8/12/201

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8

|

Series1 27.2x 25.8x 21.7x 18.9x 17.5x

[


Exhibit 11: One year forward PE of company vs. BSE Healthcare Index

0.00

10.00

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30.00

40.00

50.00

2/12/201

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8/12/201

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2/12/201

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8/12/201

2

2/12/201

3

8/12/201

3

2/12/201

4

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2/12/201

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8/12/201

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2/12/201

6

8/12/201

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2/12/201

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8/12/201

7

2/12/201

8

(x)

Glenmark Pharma CNX Pharma Index

32% Discount


Exhibit 12: Valuation

Revenues Growth Adj. EPS Growth P/E EV/EBITDA RoNW RoCE

(| crore) (%) (|) (%) (x) (X) (%) (%)

FY17 9186 20.1 42.2 60.1 13.7 9.2 26.5 19.5

FY18E 9161 -0.3 33.4 -20.8 16.1 10.1 17.5 16.2

FY19E 9498 3.7 31.5 -5.8 17.1 10.6 14.3 14.3

FY20E 10343 8.9 38.2 21.2 14.1 9.1 14.9 15.5



Recommendation history vs. Consensus

0

200

400

600

800

1,000

1,200

1,400

Feb-18Nov-17Sep-17Jul-17Apr-17Feb-17Nov-16Sep-16Jul-16Apr-16Feb-16Nov-15Sep-15Jun-15Apr-15Feb-15

(|

)

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

(%

)

Price Idirect target Consensus Target Mean % Consensus with BUY

Source: Reuters, Company, ICICIdirect.com Research

Key events

Aug-09 Forest & Glenmark Pharma announce Phase IIb results for Oglemilast. The molecule did not show satisfactory results compare to its Placebo.

Oct-09 Launches four products in the UK market through its subsidiary Glenmark Generics Europe.

Mar-10 Receives USFDA approval for its new drug application for Oxycodone Hydrochloride capsules and liquid solutions filed as an NDA with USFDA under 505b2 route.

May-10 Enters into an agreement with Sanofi to out-license its GRC 15300 molecule. Receives US$ 20 million as an upfront payment.

Jan-11 Sanofi & Abbott win patent litigation case of generic Tarka. A Federal jury asks Glenmark to pay US$ 16 million as damages for launching at risk in the US market.

Apr-11 Enters into an exclusive agreement with a Canadian base company ImmanenceIntegrale Dermo Correction (IDC) to market high end dermatology products in eight

countries including India & Brazil.

May-11 Out-licenses monoclonal antibody GBR 500 to Sanofi. Receives US$ 50 million as upfront payment.

Aug-12 The International Center for Dispute resolution rules in favor of Glenmark on the arbitration claim it filed against Napo Pharma. Glenmark will have rights to develop,

commercialise and distribute Crofelemer in 140 emerging markets.

Jul-13 Confirms filing of ANDA for Lacosamide tablets and oral solutions with the USFDA under Para IV certification.

Mar-14 Provided | 213 crore for Tarka liability

Jan-15 Receives shareholders' approval to raise up to $300 million (around | 1,890 crore) through issue of securities

Oct-15 Sanofi calls off its deal with Glenmark related to the development of Vatelizumab drug (GBR 500), a monoclonal antibody (MaB) for multiple sclerosis.The drug is in

Phase II clinical trials

Dec-16 Launched gZetia (CVS) in the US under exclusivity

Dec-16 Goa formulation facility receives four form 483 observations from the USFDA

Mar-17 Announces positive phase-III clinical trials result for GSP 301 (nasal spray) conducted in the US

Mar-17 USFDA clears investigational new drug (IND) application to begin a Phase II study of GSP 304 (tiotropium bromide; COPD)


Top 10 Shareholders Shareholding Pattern

Rank Investor Name Latest Filing Date % O/S PositionPosition Change

1 Saldanha Family Trust 30-Sep-17 45.4 128.2 0.0

2 Aranda Investments (Mauritius) Pte. Ltd. 30-Sep-17 4.0 11.3 0.0

3 OppenheimerFunds, Inc. 30-Sep-17 3.7 10.4 0.0

4 Templeton Asset Management Ltd. 30-Sep-17 2.4 6.7 3.2

5 HSBC Global Asset Management (Hong Kong) Limited 30-Sep-17 1.8 5.0 1.5

6 Franklin Templeton Investment Management Ltd. 30-Sep-17 1.7 4.9 1.6

7 The Vanguard Group, Inc. 30-Sep-17 1.7 4.7 -0.2

8 BlackRock Institutional Trust Company, N.A. 30-Sep-17 1.4 3.9 0.0

9 Life Insurance Corporation of India 30-Sep-17 1.3 3.7 0.0

10 T. Rowe Price International (UK) Ltd. 30-Jun-17 1.1 3.0 -1.0

(in %) Dec-16 Mar-17 Jun-17 Sep-17 Dec-17

Promoter 46.5 46.5 46.5 46.5 46.5

Others 53.5 53.5 53.5 53.5 53.5

Source: Reuters, ICICIdirect.com Research

Recent Activity

Investor name Value ($ mn) Shares Investor name Value ($ mn) Shares

Templeton Asset Management Ltd. 29.1 3.2 T. Rowe Price International (UK) Ltd. -9.9 -1.0

Franklin Templeton Investment Management Ltd. 14.3 1.6 Mirae Asset Global Investments (Hong Kong) Limited -7.1 -0.8

HSBC Global Asset Management (Hong Kong) Limited 13.7 1.5 Unigestion -5.7 -0.6

Mirae Asset Global Investments (India) Pvt. Ltd. 6.6 0.7 BNP Paribas Asset Management USA, Inc. -6.8 -0.5

Franklin Templeton Asset Management (India) Pvt. Ltd. 3.6 0.4 Wasatch Advisors, Inc. -4.8 -0.5

Buys Sells

Source: Reuters, ICICIdirect.com Research


. Financial summary

Profit and loss statement | Crore

(Year-end March) FY17 FY18E FY19E FY20E

Revenues 9,185.7 9,161.0 9,497.9 10,343.2

Growth (%) 20.1 -0.3 3.7 8.9

Raw Material Expenses 2,614.3 3,032.6 3,134.3 3,413.3

Employee Expenses 1,640.8 1,851.7 1,804.6 1,965.2

Other Manufacturing Expenses 2,893.9 2,452.7 2,849.4 2,999.5

Total Operating Expenditure 7,149.0 7,337.1 7,788.3 8,378.0

EBITDA 2,036.7 1,824.0 1,709.6 1,965.2

Growth (%) 41.7 -10.4 -6.3 15.0

Interest 237.3 281.6 260.9 242.5

Depreciation 264.4 303.7 331.9 360.9

Other Income 37.4 28.9 66.5 72.4

PBT before Exceptional Items 1,572.4 1,267.5 1,183.3 1,434.3

PBT 1,491.4 1,267.5 1,183.3 1,434.3

Total Tax 382.7 325.7 295.8 358.6

PAT before MI 1,108.8 941.8 887.5 1,075.7

PAT 1,108.8 941.8 887.5 1,075.7

Adjusted PAT 1,189.8 941.8 887.5 1,075.7

Growth (%) 60.1 -20.8 -5.8 21.2

EPS (Adjusted) 42.2 33.4 31.5 38.2


Cash flow statement | Crore


Profit/(Loss) after taxation 1,108.8 941.8 887.5 1,075.7

Add: Depreciation & Amortization 345.3 303.7 331.9 360.9

Net Increase in Current Assets -890.0 -63.4 -201.3 -541.4

Net Increase in Current Liabilities 28.5 38.6 100.3 213.7

Others 64.8 281.6 260.9 260.9

CF from operating activities 657.4 1,502.4 1,379.3 1,369.8

(Inc)/dec in Investments 1.5 0.0 0.0 0.0

(Inc)/dec in Fixed Assets -748.5 -600.0 -600.0 -600.0

Others -254.2 -135.2 -148.8 -163.6

CF from investing activities -1,001.2 -735.2 -748.8 -763.6

Inc / (Dec) in Equity Capital 0.3 0.0 0.0 0.0

Inc / (Dec) in Loan Funds 794.3 -571.0 -306.0 -271.7

Other -251.5 -347.5 -326.8 -326.8

CF from financing activities 543.0 -918.6 -632.8 -598.5

Net Cash flow 199.2 -151.4 -2.2 7.7

Opening Cash 857.1 1,056.4 904.9 902.7

Closing Cash 1,056.4 904.9 902.7 910.4

Free Cash Flow -91.1 902.4 779.3 769.8


Balance sheet | Crore


Equity Capital 28.2 28.2 28.2 28.2

Reserve and Surplus 4,464.3 5,340.2 6,161.8 7,171.6

Total Shareholders fund 4,492.5 5,368.4 6,190.0 7,199.9

Total Debt 4,723.7 4,152.6 3,846.7 3,575.0

Deferred Tax Liability 25.7 28.2 31.0 34.2

Minority Interest -0.4 -0.5 -0.5 -0.6

Other Non Current Liabilities 32.8 36.0 39.6 43.6

Source of Funds 9,274.2 9,584.8 10,106.9 10,852.0

Gross Block - Fixed Assets 4,722.0 5,222.0 5,722.0 6,222.0

Accumulated Depreciation 2,014.8 2,318.5 2,650.4 3,011.3

Net Block 3,415.3 3,711.6 3,979.7 4,218.8

Goodwill on Consolidation 47.9 47.9 47.9 47.9

Intangible Assets 0.0 0.0 0.0 0.0

Investments 15.7 15.7 15.7 15.7

Inventory 2,139.1 2,162.4 2,236.4 2,435.4

Cash 1,056.4 904.9 902.7 910.4

Debtors 2,404.3 2,430.5 2,513.7 2,737.4

Other Current Assets 1,274.9 1,288.8 1,332.9 1,451.5

Total Current Assets 6,874.6 6,786.6 6,985.7 7,534.8

Creditors 1,903.5 1,924.3 1,990.1 2,167.3

Provisions & Other CL 586.2 604.1 638.5 675.1

Total Current Liabilities 2,489.7 2,528.3 2,628.6 2,842.3

Net Current Assets 4,384.9 4,258.3 4,357.0 4,692.4

LT L& A, Other Assets 99.1 109.0 119.9 131.8

Deferred Tax Assets 1,311.3 1,442.4 1,586.6 1,745.3


Key ratios


Per share data (|)

Adj EPS 42.2 33.4 31.5 38.2

BV 159.5 190.6 219.8 255.7

DPS 2.4 2.3 2.3 2.3

Cash Per Share 71.5 82.3 94.1 106.9

Operating Ratios (%)

Gross Margin 71.5 66.9 67.0 67.0

EBITDA margins 22.2 19.9 18.0 19.0

Net Profit margins 13.0 10.3 9.3 10.4

Inventory days 85 86 86 86

Debtor days 96 97 97 97

Creditor days 76 77 76 76

Asset Turnover 1.9 1.8 1.7 1.7

EBITDA conversion Rate 32.3 82.4 80.7 69.7

Return Ratios (%)

RoE 26.5 17.5 14.3 14.9

RoCE 19.5 16.2 14.3 15.5

RoIC 29.3 24.2 21.1 22.9

Valuation Ratios (x)

P/E 13.7 16.1 17.1 14.1

EV / EBITDA 9.2 10.1 10.6 9.1

Market Cap / Sales 1.7 1.7 1.6 1.5

Price to Book Value 3.4 2.8 2.4 2.1

Solvency Ratios

Debt / Equity 1.1 0.8 0.6 0.5

Debt / EBITDA 2.3 2.3 2.3 1.8

Current Ratio 2.3 2.3 2.3 2.3



ICICIdirect.com coverage universe (Healthcare)

Company I-Direct CMP TP Rating M Cap

Code (|) (|) (| Cr) FY17 FY18E FY19E FY20E FY17 FY18E FY19E FY20E FY17 FY18E FY19E FY20E FY17 FY18E FY19E FY20E

Ajanta Pharma AJAPHA 1441 1,515 Hold 12680.2 57.4 57.0 63.5 75.7 25.1 25.3 22.7 19.0 42.3 34.6 31.5 30.2 33.7 26.8 24.4 23.9

Alembic Pharma ALEMPHA 555 570 Hold 10459.8 21.2 23.7 23.0 28.6 26.2 23.5 24.1 19.4 25.3 19.6 17.6 19.7 21.0 19.9 16.8 18.0

Apollo Hospitals APOHOS 1136 1,060 Hold 15810.9 15.9 13.4 24.2 34.4 71.6 84.5 46.9 33.1 6.1 7.5 9.9 12.1 6.0 4.9 8.2 10.7

Aurobindo Pharma AURPHA 609 665 Hold 35683.2 38.8 42.6 38.0 41.5 15.7 14.3 16.0 14.7 24.4 23.5 18.4 17.9 24.2 21.3 16.1 15.2

Biocon BIOCON 615 680 Buy 36870.0 8.5 8.4 11.9 16.9 72.5 73.5 51.8 36.3 9.6 10.2 13.9 17.1 10.5 9.6 12.3 15.4

Cadila Healthcare CADHEA 426 405 Hold 43637.0 14.5 16.6 18.1 20.3 29.3 25.6 23.6 21.0 13.1 17.6 16.7 17.3 21.4 20.7 19.2 18.6

Cipla CIPLA 629 640 Hold 50638.2 12.5 19.6 26.8 32.1 50.2 32.2 23.5 19.6 7.7 9.7 14.5 16.0 8.0 11.4 13.9 14.7

Divi's Lab DIVLAB 1027 1,070 Hold 27257.0 39.9 32.7 40.7 48.7 25.7 31.4 25.2 21.1 25.3 19.3 21.2 22.2 19.8 14.7 16.2 16.9

Dr Reddy's Labs DRREDD 2224 2,520 Hold 36887.7 78.0 59.4 93.4 140.2 28.5 37.4 23.8 15.9 7.3 6.8 9.5 12.1 10.5 7.5 10.8 14.2

Glenmark Pharma GLEPHA 539 535 Hold 15217.3 42.2 33.4 31.5 38.2 12.8 16.1 17.1 14.1 19.5 16.2 14.3 15.5 26.5 17.5 14.3 14.9

Indoco Remedies INDREM 277 280 Hold 2553.5 8.4 4.8 12.2 15.4 33.1 57.4 22.7 18.0 8.7 5.4 11.2 13.8 11.8 6.5 14.5 16.0

Ipca Laboratories IPCLAB 626 715 Buy 8116.0 15.4 21.4 37.6 44.7 40.6 29.2 16.7 14.0 8.7 9.6 15.5 16.7 7.9 10.1 15.4 15.9

Jubilant Life JUBLIF 940 1,090 Buy 14966.1 36.1 46.9 68.0 85.3 26.0 20.0 13.8 11.0 13.8 14.7 18.4 20.4 16.8 18.1 21.0 21.0

Lupin LUPIN 840 850 Hold 37950.2 56.7 30.2 35.1 45.2 14.8 27.8 23.9 18.6 16.6 10.0 10.9 13.7 19.0 9.3 10.0 11.6

Narayana Hrudalaya NARHRU 314 360 Buy 6415.9 4.1 3.8 6.4 9.7 76.0 83.0 48.8 32.3 12.5 10.5 14.1 18.4 8.8 7.4 11.2 14.5

Natco Pharma NATPHA 827 910 Hold 15257.6 26.3 34.8 41.5 26.7 31.4 23.8 19.9 30.9 33.6 26.7 28.1 16.7 29.5 21.4 21.9 12.9

Sun Pharma SUNPHA 594 485 Hold 142515.4 29.0 14.7 18.2 22.2 20.5 40.5 32.6 26.7 20.3 10.7 12.2 13.5 19.0 9.1 10.3 11.4

Syngene Int. SYNINT 598 680 Buy 11960.0 14.4 13.6 19.0 22.7 41.6 41.6 31.4 26.3 16.8 16.2 20.3 21.7 20.3 16.4 18.8 18.5

Torrent Pharma TORPHA 1420 1,369 Hold 24030.2 55.2 39.4 66.7 79.8 25.7 36.1 21.3 17.8 18.9 19.4 21.2 22.9 21.5 13.7 19.8 20.1

RoE (%)EPS (|) PE(x) RoCE (%)



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Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;

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