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Glenmark Pharma: India 'formulates' growth!

Feb 8, 2006

Performance summary
Glenmark Pharma announced robust results for the third quarter and nine months ended December 2005. While topline grew at a healthy double-digit pace, operating margins witnessed shrinkage on account of rise in raw material expenses. Nevertheless, a sharp fall in interest costs coupled with the robust topline performance contributed to the 43% YoY growth in bottomline.

Financial performance: A snapshot
(Rs m) 3QFY05 3QFY06 Change 9mFY05 9mFY06 Change
Net sales 1,264 1,586 25.4% 3,671 3,966 8.0%
Expenditure 1,000 1,282 28.2% 2,749 3,273 19.1%
Operating profit (EBIDTA) 264 304 15.0% 923 694 -24.8%
Operating profit margin (%) 20.9% 19.2%   25.1% 17.5%  
Other income 7 8 21.3% 39 27 -29.4%
Interest 44 20 -55.1% 118 46 -60.8%
Depreciation 43 49 14.5% 109 138 26.9%
Profit before tax 184 244 32.1% 734 537 -26.9%
Tax 63 71 11.8% 226 114 -49.5%
Profit after tax/ (loss) 121 173 42.7% 508 422 -16.9%
Net profit margin (%) 9.6% 10.9%   13.8% 10.7%  
No. of shares (m) 59.3 118.6   59.3 118.6  
Diluted earnings per share (Rs)*         4.6  
P/E ratio (x)*         70.2  
(* trailing twelve months)            

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 formulations business contributed about 50% to the company's revenue in FY05. 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 3QFY06?
Strong topline performance: Glenmark's topline registered a robust 25% YoY growth driven by its formulations business in India. The growth was attributed to the rise in retail demand, which was due to greater divisionalisation and addition of sales force. The company also launched 10 new products and line extensions across its seven retail divisions. API sales were flat during the quarter. However, they are expected to increase in 4QFY06 backed by an increased off-take of new bulk drugs such as Strontium Ranelate and Acitretin. Exports posted a healthy 18% YoY growth. During the quarter the company obtained registrations of 45 formulation products and also commenced formulations exports to Costa Rica.

Standalone business snapshot
(Rs m) 3QFY05 3QFY06 Change 9mFY05 9mFY06 Change
India formulations 762 1,043 36.9% 2,129 2,755 29.4%
India API & co-marketing 169 169 0.1% 634 451 -28.8%
Exports from India 454 539 18.7% 1,210 1,177 -2.8%
Total 1,385 1,751 26.4% 3,973 4,383 10.3%

Huge margin contraction: A significant rise in raw material costs (as percentage of sales) led to the dip in operating margins, which fell by 170 basis points during the quarter. However, the company managed to keep its staff costs and selling expenses under control.

Cost break-up
(% of sales) 3QFY05 3QFY06 9mFY05 9mFY06
Raw material cost 28.5% 35.4% 30.6% 34.4%
Staff cost 12.7% 11.5% 12.0% 13.6%
Selling, operating & other expenses 37.9% 34.0% 32.3% 34.5%

Bottomline bloats: While a strong topline growth was instrumental in boosting the 43% YoY bottomline growth, a sharp reduction in interest costs and lower tax outgo (29% of PBT in 3QFY06 compared to 34% in 3QFY05) also contributed to this growth.

What to expect?
At the current price of Rs 323, the stock is trading at a price to earnings multiple of 70.2 times its trailing twelve months earnings. Glenmark's presence in the regulated markets of the US and Europe is in its nascent stages. However, it has adopted the strategy of entering into alliances with companies, which is likely to give a boost to its US generics business going forward.

Glenmark acquired a South African company, Bouwer Bartlett, in December 2005. This company has a significant marketing force and a basket of 22 products and is expected to further strengthen Glenmark's presence in the African continent. The company's R&D initiatives are also likely to stand it in good stead in light of the patent regime in the country. Glenmark has already out-licensed its lead molecule for asthma to Forest Labs, US and Teijin Pharma, Japan in return for which, it has received milestone payments and is on the lookout for a European partner as well. However, receipt of further milestone payments will be dependent on the progress of the molecule.

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