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Glenmark: Forex impact on margins

Jan 30, 2013

Glenmark has announced its 3QFY13 results. The company has reported 34% YoY growth in sales and a 375% YoY increase in net profits. Here is our analysis of the results.

Performance summary
  • Topline grows by 34% YoY during the quarter led by growth in both its specialty and generics businesses.
  • Operating margins surge by 13% leading to a 211% YoY growth in operating profits.
  • Bottomline growth jumps by 375% YoY during 3QFY13 with the net margins also improving by 11%.

Financial performance snapshot
(Rs m) 3QFY12 3QFY13 Change 9MFY12 9MFY13 Change
Net sales 10,310 13,812 34.0% 29,547 36,768 24.4%
Expenditure 9,284 10,615 14.3% 23,301 29,211 25.4%
Operating profit (EBDITA) 1,026 3,197 211.4% 6,246 7,557 21.0%
EBDITA margin (%) 10.0% 23.1%   21.1% 20.6%  
Other income 110 55 -49.9% 201 153 -23.7%
Interest (net) 359 400 11.3% 1,102 1,164 5.7%
Depreciation 231 356 54.0% 742 952 28.2%
Profit before tax 545 2,496 357.6% 4,603 5,594 21.5%
Exceptional expense - -   1,317    
Tax 84 366 335.1% 165 1,062 543.6%
Minority Interest 13 1   21 52 150.0%
Profit after tax/(loss) 448 2,129 374.8% 3,100 4,480 44.5%
Net profit margin (%) 4.3% 15.4% 11.1% 10.5% 12.2%  
No. of shares (m)         270.0  
Diluted earnings per share (Rs)         22.1  
Price to earnings ratio (x)*         22.6  
*based on trailing 12 months earnings

What has driven the performance in 3QFY13?
  • Topline grew by 34% YoY during the quarter led by growth in both its specialty and generics businesses. However, excluding the licensing income received from Forest Labs, the topline still witnessed healthy growth of 32% YoY.

    Consolidated Business Snapshot
    Consolidated Business Snapshot 3QFY12 3QFY13 Change 9MFY12 9MFY13 Change
    Generics Business
    US 3,190 4,365 36.8% 8,702 12,596 44.7%
    Europe 307 395 28.8% 668 1,116 67.2%
    Latin America 36 51 43.1% 106 144 36.1%
    API 836 999 19.5% 2,244 3,038 35.4%
    Total Generics (i) 4,368 5,810 33.0% 11,720 16,894 44.1%
    Specialty Business
    India 2,547 3,307 29.9% 7,340 9,545 30.1%
    RoW 1,571 2,620 66.7% 4,097 5,909 44.2%
    Latin America 825 964 16.9% 2,155 2,531 17.5%
    Europe 664 467 -29.7% 1,257 1,116 -11.2%
    Total Specialty Business (ii) 5,607 7,358 31.2% 14,849 19,101 28.6%
    Out Licensing Income (iii) 238 493   2,535 493  
    Others (iv) 97 151 55.7% 443 280 -36.7%
    Total (i)+(ii)+(iii)+(iv) 10,310 13,812 34.0% 29,547 36,768 24.4%

  • In the generics business, the US business recorded a growth of 37% YoY, and in constant currency terms growth was at 30%. The company has 46 products awaiting approval of which 18 are Para IVs. EU generics witnessed robust growth of 29% YoY on the back of new launches. The constant currency growth was at 19% for this segment. The company has also in-licensed three products during the quarter. Latin America too showed healthy growth of 29% YoY. Large part of this growth was driven by all the regions except Brazil. It is pertinent to note that large part of Latam growth is dependent on Brazil. For some time this geography has been witnessing growth pressures due to ANVISA strike and lack of new approvals. As per the management, new approvals will be the key to growth in Brazil.

  • In the Specialty segment, India witnessed robust growth of 30% YoY for 3QFY13 vs. industry growth of 11%. During the quarter, the company initiated sales for generic-generic drugs and also made some launches in the OTC segment. As per the management, the company has not made huge investments for OTC segment as of now. Also, launches in the generic-generic segment have been done to diversify the business portfolio. Though the current quarter has witnessed robust growth, as per the company, the growth will taper down going forward. For FY13, the growth will be in range of 20%-23%. The RoW markets witnessed robust growth of 67% YoY, which was due to healthy performance in Ukraine, Kazakhstan and Egypt. These segments grew by ~100% for the current quarter. However, growth will come down to 25%-30% in upcoming period.

  • On the R&D front, the company has guided for a run rate of 8% of sales for the upcoming period. Of this, Rs 2 bn will be spent for NCE programs and the remaining for generic products in various markets.

  • Operating margins improved by 13% leading to a 211% YoY growth in operating profits. Further, the company witnessed MTM forex gain of Rs 40 m for the quarter vs. MTM forex loss of Rs 1,020 m in 3QFY12. Adjusting for this forex, margins improved by 6%, which is still commendable and came in despite higher R&D expenses.

  • Bottomline increased by 375% YoY during 3QFY13 led by the strong show at the operating level. However, after adjusting for forex at the operating level, the bottom line grew by 72% with net profit margins of 18.1%, an improvement of 4%.
Update on R&D programs and other drugs
  • Revamilast (GRC 4039): Glenmark announced the discontinuation of the development of Revamilast for Rheumatoid Arthritis indication. Though the company stated that the trial data witnessed better outcome data, the efficacy was not able to beat the drugs which are available for the existing class. However, the company will continue to work on trials for Asthma indication.

  • mPGES-1 inhibitors: Glenmark has entered into an option agreement with the Forest Labs on a collaboration for the development of novel mPGES-1 inhibitors to treat chronic inflammatory conditions including pain. Glenmark is entitled for payment of $9m from Forest, of which $6m is upfront fees and $3m for trials.

  • GRC 15300: A PhIIa proof of concept study in neuropathic pain was initiated during 1QFY13. The company expects results anytime in FY14. Sanofi has been granted development and commercialization license for this drug.

  • Mupirocin calcium cream 2%: In Jan 2013, the company received approval for generic Mupicrocin Calcium cream 2% from the USFDA. The total market size of Mupirocin Calcium cream is US$ 57 m. Glenmark is the only generic company to get the approval for this version. Though there are other companies who hold approval for Mupirocin based products, they are non-calcium based ointments. Mupirocin Calcium Cream is indicated for the treatment of secondarily infected traumatic skin lesions.

    The company has started selling the drug in the US market. However, soon after the launch Glenmark had filed litigation against GSK who is the innovator of the product and sells the drug with brand name Bactroban. The litigation filed by Glenmark was to seek declaratory judgment, that its drug does not infringe GSK's product. In Nov 2012, GSK had sent a letter to Glenmark enquiring about the probable launch of the said drug. During that time GSK had not listed its patent in the orange book. However, later GSK listed the patents in the orange book. With the patents now being listed, Glenmark might be sued by the innovator for launching a drug which is patent protected. Thus, Glenmark filed litigation asking for declaratory judgment, that its drug does not infringe the innovator's drug.

    We believe the company can fetch revenues in the range of US$10-US$ 15 m from this launch as Glenmark is the only company to launch the drug. The patents in issue are set to expire in October 2014. Thus, Glenmark can witness low competition till the said period. However, as no step is yet taken by GSK, there exists the possibility of GSK bringing temporary withdrawal order from court or any such court filing which might result in Glenmark's product withdrawal. GSK might also bring an authorized generic drug, which will compete with Glenmark's drug.

Financial highlights
  • Net debt - Rs 21 bn. The company expects this to reduce going forward.

  • Capex: For 9mFY13 this has been Rs 3.4 bn and during the quarter the same has been Rs 1 bn. As per the company, the current capex also includes investments done by Salix for Crofelemer and some forex impact.

What to expect?
At the current price of Rs 497, the stock is trading at a price to earnings multiple of 13.4 times our estimated FY15 earnings. Going forward, the key growth drivers for the company will be the US, Latin America and ROW markets. In US especially, its focus on a niche product portfolio will augur well for the company. The Indian business is expected to show good performance on the back of increased market share. We have also seen improvement on the balance sheet side with its working capital cycle improving and the debt reducing. The company is expecting trial data for its R&D pipeline in next 12-18 months and is also looking out for licensing partners for its pipeline. Overall, we maintain our positive view on the stock from a long term perspective. As the price has moved by ~16% in the last three months, we advise our investors now to Hold on to the stock.

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