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Glenmark: US leads the charge

Jan 23, 2007

Performance summary
Glenmark Pharma reported a robust set of numbers for the third quarter and nine months ended December 2006. For 3QFY07, topline (both on a standalone and consolidated basis) grew at a healthy pace led by strong revenue growth in the international markets. Operating margins (on a standalone basis) improved considerably on account of a fall in raw material costs and SG&A expenses (as percentage of sales). This, combined with the higher other income, contributed to the healthy growth in bottomline.

Financial performance: Standalone snapshot
(Rs m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Net sales 1,625 2,019 24.2% 3,971 5,278 32.9%
Expenditure 1,321 1,502 13.6% 3,277 4,076 24.4%
Operating profit (EBIDTA) 304 517 70.0% 694 1,202 73.3%
Operating profit margin (%) 18.7% 25.6%   17.5% 22.8%  
Other income 8 18 118.7% 27 40 47.3%
Interest 20 80 303.2% 46 162 248.5%
Depreciation 49 59 19.5% 138 175 27.0%
Profit before tax 243 397 63.0% 536 905 68.8%
Tax 71 95 34.9% 114 183 60.3%
Profit after tax/ (loss) 173 302 74.4% 422 722 71.0%
Net profit margin (%) 10.6% 14.9%   10.6% 13.7%  
No. of shares (m) 118.6 118.7   118.6 118.7  
Diluted earnings per share (Rs)*         8.2  
P/E ratio (x)*         75.7  
(* on a trailing 12-months basis)

What is the company’s business?
Glenmark Pharma is a mid-sized company with focus on niche therapeutic areas of dermatology, gynecology, pediatrics and diabetics. The domestic formulations business contributed about 56% to the company's revenue in FY06. On the international front, while exports to the semi-regulated markets have been growing at a strong pace, the company is also looking to establish a presence in the US generics market and has entered into alliances with KV Pharma, Interpharm Inc, Konec Labs, InvaGen and Shasun Chemicals. The company is also focusing on R&D and has out licensed its lead compound for asthma to Forest Laboratories, US and Teijin Pharma, Japan in return for milestone payments.

What has driven performance in 3QFY07?
US and Latin America propel the topline: Glenmark’s topline on standalone and consolidated bases grew by 24% YoY and 118% YoY respectively during the quarter. This was led by superlative performance of its formulations business in the US, Latin America and Rest of the World (ROW) markets. On a consolidated basis, revenues from the US markets ballooned by 401% YoY largely due to a ramp up in the number of products launched in the market. Glenmark now has 12 products on market (3 products launched in 3QFY07) and is planning to launch 3 more in 4QFY07. ‘Flucanozole’, ‘Zonisamide’ and ‘Gabapentin’ were the key growth drivers during the quarter under review. The company’s strategy to focus on niche areas like controlled substances also paid off in propelling revenues. Glenmark and its partners have filed 38 ANDAs to date and expect to end the year with 15 to 20 ANDAs in the market.

In Latin America, the Brazilian and Argentinean markets mainly contributed to the topline, resulting in a 116% YoY growth in revenues. Glenmark filed 4 new dossiers with various regulatory bodies in Latin America and received approval to market 11 products during the quarter, taking the total number of registrations to 19.

Consolidated business snapshot
(Rs m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
US 167 835 400.7% 249 1,404 464.6%
Latin America 135 292 115.8% 374 745 98.9%
Rest of the World (ROW) 324 425 31.1% 786 1,334 69.7%
India 1,043 1,123 7.7% 2,754 3,093 12.3%
Total formulations 1,669 2,676 60.3% 4,163 6,576 58.0%
API 377 390 3.4% 822 962 17.1%
Out-licensing revenues - 1,395   263 1,395  
Total 2,047 4,461 118.0% 5,248 8,934 70.2%

India – Strong recovery: Revenues from the domestic formulations business grew by 8% YoY during the quarter. The company launched 9 new products and line extensions during the quarter and expects this business to grow at around 13% per annum going forward.

API picture: Revenues from the API segment grew by a muted 3% YoY, owing to an 8% YoY decline in export sales to the regulated and semi-regulated markets. However, revenues from the domestic API business grew by 22% YoY lending some sort of respectability to the overall API revenue growth, In the US, Glenmark filed 6 DMFs (drug master files) in 9mFY07 and is looking to file 6 in 4QFY07.

R&D and out-licensing revenues: During the quarter, Glenmark had out-licensed its anti-diabetic molecule GRC 8200 to Merck KGaA of Germany in a deal involving potential milestone payments of EUR 190 m. The company has received an upfront milestone payment of EUR 25 m during the quarter. As per the terms of the deal, Glenmark will retain commercialisation rights for India and share marketing rights with Merck for the other markets (i.e. Rest of the World).

As far as ‘Oglemilast’ is concerned, The Phase II A clinical trials have been completed and the results of the same are expected in the next one month. Also, once the US FDA questions have been answered, the molecule will move into Phase II B trials. This is likely to trigger the next milestone payment of US$ 30 m. However, it must be noted that the company in its analyst meet in November 2006 had factored in this milestone payment in its FY08 numbers while issuing its guidance.

What to expect?
At the current price of Rs 621, the stock is trading at a multiple of 27.1 times our estimated FY09 consolidated earnings. Glenmark’s presence in the regulated markets, especially the US, has been gaining scale and the company has adopted the strategy of entering into alliances with companies, which is likely to give a further boost to its US generics business going forward.

Similarly, the company has embarked on a strategy of increasing its presence in the Latin American and semi-regulated markets as well, which will further drive topline growth. On the R&D front, with ‘Oglemilast’ moving into Phase II clinical trials, Glenmark is awaiting the receipt of the next milestone payment for the same from Forest Labs (will accrue in FY08 as per the company guidance). Besides, it is also looking to find out-licensing partners for the same molecule in the European markets. Glenmark has recently signed an agreement with Merck KgaA for out-licensing the former’s anti-diabetic molecule GRC 8200. The company is expected to receive milestone payments for the same, the total value of which could be 190 m euros. While out-licensing is a positive step in terms of monetising R&D expenditure, research being a high-risk business, the possibility of failure cannot be ignored.

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