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Glenmark: Research meet extracts
Apr 5, 2010

We had a meeting with Glenmark late last week to understand the performance of the company and growth prospects going forward. Here are the key takeaways. A year when all went haywire: FY09 was a very challenging year for Glenmark. Until then Glenmark had been growing nicely both on the topline and bottomline front. What is more, the company had also been successful in bagging several out-licensing deals for its molecules with global innovators in return for milestone payments. But things went awry in FY09. For starters, 2 of its molecules namely 'Melogliptin' and 'GRC 6211' were returned to the company. However, while Glenmark is still conducting trials on 'Melogliptin', those on GRC 6211 for the time being have been stalled.

Besides this, with respect to its core business, adverse credit conditions in the semi regulated markets, delay in product approvals by the US FDA, recession in the developed markets and volatile currency movements all converged to considerably impact Glenmark’s performance. Nevertheless, the scenario considerably improved in 9mFY10 and we believe that the company should record good growth across business segments going forward.

Growth drivers in the US: Though Glenmark's US business had received some setbacks last fiscal, the fact that approvals have picked up pace is an encouraging sign. The company's strategy is to focus on the niche therapeutic areas of dermatology, hormones, controlled substances, oncology and the like which will stand it in good stead in the future. This is because these areas have lesser competition and price erosion and therefore higher potential to generate more revenues and profits. Niche products do not currently contribute much to the overall US business, but their contribution is expected to ramp up in the future. In the US, at present, Glenmark has 50 products in the market and expects around 10 approvals every year going forward. Also, plans on the anvil include filing ANDAs for 15-20 products every year.

Latin American business will ramp up too: Revenues from Latin America (excluding Argentina) declined in FY09. This was largely due to restructuring of the business from a tender based model to a prescription based one. This will ensure that the company generates higher revenues and profits in the future. In Argentina, the company has been focusing on oncology generics. Glenmark intends to use Argentina as a hub to market oncology products in the US and Europe. Once that happens, which is two years from now, sales from Argentina are expected to significantly grow.

Out-licensing deals: As far as 'Oglemilast' is concerned, while the trial data was not encouraging for COPD (smoker’s disease), the company is now conducting trials on the molecule for asthma. The molecule will enter Phase III trials at the end of this year depending on what the Phase IIb trial data shows. The company is also on the lookout for a partner. In the event that the company is not able to find a partner for developing this molecule, then Glenmark will look to market this molecule in the semi-regulated markets where the cost of conducting clinical trials is much cheaper.

Reducing debt: Glenmark has amassed quite a lot of debt on its books in order to fund its expansion plans across geographies. The debt equity ratio as of FY09 stood at 1.3. The company plans to utilize proceeds from the Glenmark Generics (GGL) IPO for retiring some of this debt. Besides this, the cash flows generated from the core business will also go towards retiring this debt. As far as the GGL IPO is concerned, the company has filed a prospectus with SEBI and would probably come out with the same once the formalities are completed and the valuations appear right to the company.

What to expect?
At the current price of Rs 269, the stock is trading at a price to earnings multiple of 12.1 times our estimated FY12 earnings (excluding the out-licensing deals). We maintain our view on the stock.

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