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Glenmark: Growth across segments - Views on News from Equitymaster
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Glenmark: Growth across segments
Jul 31, 2007

Performance summary
  • Revenues grow by 92% YoY fuelled by strong growth in the US and Latin American markets and contribution from the European market through the acquisition of the Czech company Medicamenta.

  • Domestic business reports healthy growth of 49% YoY.

  • EBDITA margins expand by 11.6% due to a considerable reduction in all costs (as percentage of sales).

  • Net profits grow by 206% YoY, led by the strong performance at the operating level and despite the fall in other income and higher tax expenses.

Financial performance: Consolidated snapshot
(Rs m) 1QFY07 1QFY08 Change
Net sales 1,829 3,514 92.1%
Expenditure 1,508 2,489 65.0%
Operating profit (EBIDTA) 321 1,025 219.2%
Operating profit margin (%) 17.6% 29.2%  
Other income 45 25 -44.6%
Interest 70 144 105.0%
Depreciation 86 143 67.0%
Profit before tax 210 763 263.2%
Tax 23 191 720.6%
Profit after tax/ (loss) 187 572 206.1%
Net profit margin (%) 10.2% 16.3%  
No. of shares (m) 118.7 121.1  
Diluted earnings per share (Rs)*   15.0  
P/E ratio (x)*   46.3  
(* 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 35% to the company's revenue in FY07. 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 1QFY08?
US and Latin America propel the topline: Glenmark’s topline on a consolidated basis grew by 92% YoY during 1QFY08 led by superlative performance of its formulations business in the US, Latin America and semi-regulated markets (SRMs). On a consolidated basis, revenues from the US markets ballooned by 258% YoY largely due to a ramp up in the number of products launched in the market. During the quarter, Glenmark received final US FDA approval to market 6 products taking the total number of products launched in the US market to 19. The company filed 7 ANDAs during the quarter including 1 in the dermatology space and 2 potential Para IV opportunities. With this, Glenmark now has over 35 ANDAs undergoing FDA approval.

In Latin America, the Brazilian and Argentinean markets mainly contributed to the topline, resulting in a 174% YoY growth in revenues. The company is also present in 10 other Latin American countries. Glenmark filed 7 new dossiers with various regulatory bodies in Latin America during the quarter and is aiming to file 25 dossiers and launch 18 products in these markets during FY08. The company has also chalked out plans of focusing on oncology in these markets and has filed 35 oncology dossiers. The semi-regulated markets (SRMs) registered a decent 22% YoY growth during the quarter. Glenmark filed 74 products during the quarter and obtained registrations for 43 formulation products in various markets.

Consolidated business snapshot
(Rs m) 1QFY07 1QFY08 Change
US 231 826 258.0%
Latin America 202 553 173.5%
Semi regulated markets (SRM) 366 446 21.9%
Europe - 93  
India 861 1,281 48.7%
Total formulations 1,660 3,199 92.7%
API 255 395 54.9%
Total 1,916 3,594 87.6%

Europe: Glenmark made a foray into Europe with the acquisition of Medicamenta of the Czech Republic in line with its strategy of focusing on branded generic markets of Europe. Medicamenta reported revenues of Rs 93 m during the quarter and launched 2 new branded prescription products in the market that it had acquired from Zentiva.

India – Strong show: Revenues from the domestic formulations business grew by a robust 49% YoY during the quarter on the back of a balanced performance of the portfolio across therapy areas. The anti-infective, respiratory and cardiovascular therapeutic areas reported strong growth. The company launched 9 new products during the quarter.

API picture: Revenues from the API segment grew by a strong 55% YoY, with strong performances in both the domestic and international markets. While revenues from API exports registered a 48% YoY growth, revenues from the domestic API business grew by 63% YoY.

Sharp margin expansion: Operating margins, on a consolidated basis, improved substantially from 17.6% in 1QFY07 to 29.2% in 1QFY08 largely due to a steep reduction in all expenses (as percentage of sales). An improved product mix, ramp up in product launches and focus on branded markets also played its part in boosting the margins.

Consolidated cost breakup
(Rs m) 1QFY07 1QFY08 Change
Raw material consumption 571 984 72.3%
(% of sales) 31.2% 28.0%  
Staff cost 349 504 44.3%
(% of sales) 19.1% 14.3%  
Selling, operating & other expenses 588 1,000 70.2%
(% of sales) 32.1% 28.5%  

Bottomline bloats: Strong performances at both the topline and the operating level led to the superlative 206% YoY growth in the bottomline during the quarter. This robust growth was attained despite the 44% YoY reduction in other income and higher tax expenses.

What to expect?
At the current price of Rs 694, the stock is trading at a multiple of 46.3 times its trailing 12-month consolidated earnings. Glenmark’s presence in the regulated markets, especially the US, has been gaining scale and the company has adopted the strategy of entering into alliances with companies, and this along with a ramp up in product filings is expected to give a further boost to its US generics business going forward. The company has envisaged launching 15 to 20 products in the US market every year till FY09. 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. Thus, the international business is expected to gain significant traction going forward.

On the R&D front, with ‘Oglemilast’ having completed Phase II-A clinical trials, Glenmark is awaiting the receipt of the next milestone payment for the same from Forest Labs (will accrue in FY08 as per the company guidance). The company has signed an agreement with Merck KgaA for out-licensing the former’s anti-diabetic molecule GRC 8200. The company is expected to receive milestone payments for the same, the total value of which could be Euro 190 m and has already received an upfront milestone payment of US$ 31 m, which was recorded in its numbers in FY07. Glenmark has envisaged receiving milestone payments of around US$ 69 m every year till FY09. While out-licensing is a positive step in terms of monetising R&D expenditure, research being a high-risk business, the possibility of failure cannot be ignored.

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