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Glenmark: Bruised by US and R&D - Views on News from Equitymaster
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Glenmark: Bruised by US and R&D
Jan 28, 2009

Performance summary
  • Revenues decline by 14% YoY due to delay in product approvals in the US and absence of out-licensing income during the quarter, which was present in 3QFY08.
  • EBDITA margins tumble by a massive 20.2% due to absence of out-licensing income and 180-day exclusivity period for any drug during the quarter both of which were present in 3QFY08.
  • Bottomline plunges by 71% YoY due to the sharp fall in operating profits and surge in interest costs.

Financial performance: Consolidated snapshot
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Net sales 6,808 5,827 -14.4% 14,091 16,058 14.0%
Expenditure 3,205 3,923 22.4% 8,259 11,037 33.6%
Operating profit (EBIDTA) 3,603 1,904 -47.1% 5,832 5,021 -13.9%
Operating profit margin (%) 52.9% 32.7%   41.4% 31.3%  
Other income 13 79 488.2% 70 608 768.0%
Interest 175 343 95.9% 477 685 43.7%
Depreciation 169 291 72.3% 474 731 54.3%
Profit before tax 3,272 1,349 -58.8% 4,951 4,212 -14.9%
Tax 472 535   828 1,070 29.2%
Profit after tax/ (loss) 2,800 814 -70.9% 4,123 3,142 -23.8%
Net profit margin (%) 41.1% 14.0%   29.3% 19.6%  
No. of shares (m)       246.9 250.5  
Diluted earnings per share (Rs)*         21.3  
P/E ratio (x)*         6.8  
(* on a trailing 12-months basis)

What has driven performance in 3QFY09?
  • Glenmark’s performance in 3QFY09 was a pale shadow of its performance in 1HFY09. The topline on a consolidated basis declined by 14% YoY largely due to the subdued growth in revenues from the US, absence of out-licensing income during the quarter which was present in 3QFY08 and major devaluation in currencies in most operating markets. The latter, especially, led to the destocking of products by the supply chain as the cost of purchase increased subsequently affecting Glenmark’s sales. However, if one excludes the out-licensing income, overall growth in revenues stood at 16% YoY.

  • Revenues from the US markets (which form part of Glenmark Generics Ltd.) managed a mere 3% YoY growth. This was due to delay in product approvals from the US FDA in the last six months as also the absence of 180-day exclusivity during the quarter (it had received this exclusivity window for the drug ‘Trileptal in 3QFY08). During the quarter, the company filed 5 ANDAs and intends to file atleast 7 ANDAs in 4QFY09. Further, in the forthcoming quarter, the company is looking to launch atleast six new products.

  • The performance of the Latin American business was mixed. While revenues from the Argentina oncology business (part of Glenmark Generics Ltd.) registered a 22% YoY growth during the quarter, the other markets of Latam (like Brazil and Mexico) classified under the speciality business, reported a 16% YoY fall in revenues. Revenues from the latter were impacted by the devaluation of the currencies which led to destocking thereby hampering sales.

    Consolidated business snapshot
    (Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
    Generics business            
    US 2,041 2,104 3.1% 3,678 5,774 57.0%
    Latin America (Argentina) 90 110 22.4% 248 324 31.0%
    Europe - 41   - 73  
    API 548 527 -3.8% 1,368 1,467 7.2%
    Total generics business (i) 2,678 2,782 3.9% 5,294 7,639 44.3%
    Speciality business            
    Latin America (Brazil & others) 520 437 -16.0% 1,485 1,311 -11.7%
    Semi reulated markets (SRM) 522 833 59.7% 1,513 1,932 27.7%
    Europe 124 193 55.6% 285 612 114.8%
    India 1,157 1,568 35.6% 3,687 4,525 22.7%
    Total speciality business (ii) 2,323 3,032 30.5% 6,970 8,381 20.2%
    Out-licensing revenues (iii) 1,793 -   1,793 -  
    Total (I+ii+iii) 6,794 5,814 -14.4% 14,056 16,019 14.0%

  • As far as the other markets are concerned, sales from the semi-regulated markets grew by a healthy 60% YoY during the quarter driven by the CIS, Africa and Asia-Pacific. Revenues from India grew by a robust 36% YoY and were aided by the dermatology, respiratory and cardiovascular segments. The company launched 4 new products in the domestic region during the quarter. Revenues from the European region clocked a 56% YoY growth. This was led by the strengthening of its operations in Poland, Romania, Czech Republic and Slovakia.

  • Operating margins, on a consolidated basis, tumbled by a huge 20% during 3QFY09, largely due to the absence of out-licensing income and 180-day exclusivity period for any drug during the quarter both of which were present in 3QFY08. All this percolated down to the bottomline which plunged 71%YoY. Higher interest costs also caused the steep drop in the bottomline as the company had availed of a loan to the tune of Rs 3.5 bn during the quarter at a higher rate.

What to expect?
At the current price of Rs 140, the stock is trading at a multiple of 3.3 times our estimated FY11 earnings (excluding the out-licensing deals). The global economic crisis and the delay in product approvals have impacted the company’s performance during the year. Further, the management expects this scenario to continue for the next 2 quarters atleast and hence expects performance in FY09 and FY10 to be lower than what it had anticipated.

On the R&D front, in the previous quarter while the company was confident of receiving milestone payments to the tune of US$ 69 m every year till FY10, the company now expects considerable delay on this front. This is because given the current global meltdown, innovator companies are vary of doling out milestone payments in light of the uncertainty and the necessity to conserve cash. Thus, assuming that Glenmark does not get any more milestone payments, the R&D costs will surge as there will be no partner with whom the costs can either be shared or from whom these costs can be fully reimbursed. This will have an impact on Glenmark’s profitability.

We had valued the out-licensing deals separately on a DCF basis. As far as the core business is concerned, the company’s sales growth and operating margin numbers are 3-4% below our estimates. But in light of the slowdown, the company’s performance for the third quarter and the outlook going forward, we shall have to downgrade our estimates for the company. We shall soon update our research report on the same.

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Feb 20, 2018 03:35 PM


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