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Glenmark: Global strategy on course!

May 11, 2006

Performance summary
Glenmark Pharma announced mixed results for the fourth quarter and year ended March 2006. For the fiscal, topline grew at a healthy double-digit pace led by a strong revenue growth in all the markets in which the company operates. However, operating margins witnessed considerable shrinkage on account of rise in raw material expenses. All these factors, coupled with a significant drop in out-licensing revenues, contributed to the decline in bottomline. That said, the fourth quarter numbers were impressive both at the topline and the bottomline level.

Financial performance: A snapshot
(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Net sales 1,266 1,663 31.3% 5,694 7,003 23.0%
Expenditure 1,057 1,324 25.2% 4,136 5,608 35.6%
Operating profit (EBIDTA) 209 339 62.3% 1,558 1,395 -10.4%
Operating profit margin (%) 16.5% 20.4%   27.4% 19.9%  
Other income 15 26 75.5% 52 121 132.1%
Interest 47 12 -75.2% 173 152 -11.9%
Depreciation 41 37 -10.5% 164 230 40.3%
Profit before tax 135 317 134.1% 1,273 1,134 -10.9%
Tax 9 66 650.2% 202 227 12.4%
Profit after tax/ (loss) 126 251 98.2% 1,071 907 -15.3%
Net profit margin (%) 10.0% 15.1%   18.8% 13.0%  
No. of shares (m) 59.3 118.6   59.3 118.6  
Diluted earnings per share (Rs)*         7.6  
P/E ratio (x)*         49.3  
(* 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 FY06?
International business is gaining traction: Glenmark's topline grew by 23% YoY during the year led by a superlative performance of its formulations business in India, the US, Latin America and Rest of the World (ROW). Glenmark has completed its first year of operations in the US, and growth in this market was fuelled by the company's newly approved generic ANDAs 'Fluconazole' and 'Zonisamide'. During the year, the company filed 11 ANDAs and 16 to 17 products are currently pending US FDA approval.

In the Latin American markets, the Brazilian and Argentinean markets mainly contributed to the topline, resulting in a superlative 221% YoY growth in revenues. In Brazil, the company obtained registrations for 11 products and filed 19 dossiers with ANVISA in FY06. ROW recorded a 25% YoY growth with Glenmark obtaining registrations for 80 products during the year.

Consolidated business snapshot
(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
USA 13 324 2374.1% 13 572 4276.7%
Latin America 114 399 251.6% 237 759 220.6%
Rest of the World (ROW) 272 374 37.5% 804 1,007 25.2%
India 886 1,097 23.9% 3,028 3,937 30.0%
Total formulations 1,285 2,195 70.8% 4,082 6,275 53.7%
API 215 311 44.9% 1,153 1,017 -11.8%
Out-licensing revenues 443 -   886 266 -70.0%
Total 1,943 2,506 29.0% 6,121 7,558 23.5%

India shines: The domestic formulations segment posted a robust 30% YoY growth in revenues. Investors should note that part of this growth was due to the low base effect last year, wherein de-stocking at the stockists' level in anticipation of VAT led to a considerably lower offtake. Besides this, introduction of 6 new products during the year also played a part in augmenting revenues.

Dismal API picture: While API revenues in the regulated and the semi-regulated markets globally grew by 20% YoY, a 31% YoY decline in the domestic API revenues pared growth, resulting in a 12% YoY decline in overall API revenues. The decline was mainly attributed to the decline in the first two quarters of the year on account of withdrawal of 'Valdecoxib' and price reduction of 'Etoricoxib'.

Out-licensing revenues: Revenues from the out-licensing of the company's asthma/COPD molecule 'Oglemilast' declined significantly in FY06. It must be noted that the completion of the Phase I clinical trials was delayed during the year resulting in non-receipt of the next phase of milestone payments. Having said that, the molecule has now completed Phase I clinical trials (entering Phase II) triggering the next milestone payment, which will now be due in FY07.

Huge margin contraction: A significant 690 basis points rise in raw material costs (as percentage of sales) led to the dip in operating margins, which fell by 750 basis points during the quarter. With staff costs also witnessing an increase, reduction in other expenses could not salvage the sharp contraction in margins.

Cost break-up
(% of sales) 4QFY05 4QFY06 FY05 FY06
Raw material cost 36.0% 39.3% 29.4% 36.3%
Staff cost 11.2% 10.0% 10.9% 13.9%
Selling, operating & other expenses 36.3% 30.3% 32.4% 29.8%

It boils down to the bottomline: Despite a strong topline growth, bottomline declined by 15% YoY during FY06. This decline is despite a higher other income and lower interest costs. The company has attributed this decline mainly to the drop in the out-licensing income during the year.

What to expect?
At the current price of Rs 375, the stock is trading at a price to earnings multiple of 49.3 times its consolidated FY06 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.

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' completing Phase I trials and moving into Phase II, Glenmark is awaiting the receipt of the next milestone payment for the same from Forest Labs (will accrue in FY07). Besides, it is also looking to find out-licensing partners for the same molecule in the European markets. The company also has 6 molecules under various stages of development, which could also turn into in-licensing opportunities going forward.

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