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Glenmark: Blazing ahead - Views on News from Equitymaster

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Glenmark: Blazing ahead
Oct 27, 2008

Performance summary
  • Revenues grow by a robust 49% YoY during 2QFY09 fuelled by strong growth of the US, European and domestic businesses.
  • EBDITA margins contract by 1.6% due to a rise in raw material and staff costs (as percentage of sales).
  • Strong performance at the operating level, buoyant other income and lower interest costs result in the superlative 56% YoY growth in the bottomline.


Financial performance: Consolidated snapshot
(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Net sales 3,760 5,609 49.2% 7,283 10,230 40.5%
Expenditure 2,565 3,915 52.6% 5,054 7,114 40.8%
Operating profit (EBIDTA) 1,195 1,694 41.7% 2,230 3,117 39.8%
Operating profit margin (%) 31.8% 30.2%   30.6% 30.5%  
Other income 41 433 950.9% 57 529 834.1%
Interest 158 187 18.4% 302 342 13.5%
Depreciation 162 225 39.0% 305 441 44.3%
Profit before tax 916 1,715 87.1% 1,679 2,863 70.5%
Tax 165 541   357 536 50.2%
Profit after tax/ (loss) 751 1,174 56.2% 1,323 2,327 75.9%
Net profit margin (%) 20.0% 20.9%   18.2% 22.7%  
No. of shares (m)       243.9 250.2  
Diluted earnings per share (Rs)*         29.2  
P/E ratio (x)*         8.9  
(* on a trailing 12-months basis)

What has driven performance in 2QFY09?
  • Glenmark’s topline on a consolidated basis grew by 49% YoY during 2QFY09 led by the superlative performance of its US, European and domestic businesses. Revenues from the US markets (which form part of Glenmark Generics Ltd.) ballooned by 117% YoY largely due to a ramp up in the number of products launched. Glenmark has now launched 35 products in the US market. As on date, the company has over 40 ANDAs undergoing USFDA approval. Besides this, the company has a total of 4 potential first to file Para IV challenges so far, the market size of which has been pegged at US$ 4.1 bn. The company’s strategy also involves launching niche products with high barriers to entry and lesser competition and is thus focusing on the areas of dermatology, controlled substances, hormones and oncology going forward. Glenmark aims to launch 20 products in the US market and file for over 30 ANDAs in FY09.

  • The Latin American business also did well during the quarter. Revenues from the Argentina oncology business (also a part of Glenmark Generics Ltd.) registered a robust 49% YoY growth during the quarter. The other markets of Latam (like Brazil and Mexico) are classified under the speciality business of Glenmark. Revenues from this business grew by a decent 18% YoY after falling substantially by 36% YoY in 1QFY09. This part of the business had been undergoing a restructuring exercise, wherein Glenmark is planning to discontinue its focus on the hospital business and move towards retail. Overall, the company filed 9 products for approval with the regulatory authorities and received 12 product approvals during the quarter.

    Consolidated business snapshot
    (Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
    Generics business            
    US 811 1,761 117.3% 1,637 3,670 124.2%
    Latin America (Argentina) 96 143 49.2% 157 214 36.0%
    Europe - 32   - 32  
    API 426 539 26.6% 821 940 14.6%
    Total generics business (i) 1,332 2,475 85.8% 2,615 4,856 85.7%
    Speciality business            
    Latin America (Brazil & others) 475 562 18.4% 965 874 -9.4%
    Semi reulated markets (SRM) 545 705 29.3% 991 1,099 10.8%
    Europe 68 296 334.8% 161 420 160.3%
    India 1,329 1,559 17.3% 2,530 2,957 16.9%
    Total speciality business (ii) 2,417 3,122 29.2% 4,647 5,349 15.1%
    Out-licensing revenues (iii) - -   - -  
    Total (I+ii+iii) 3,749 5,597 49.3% 7,263 10,205 40.5%

  • As far as the other markets are concerned, sales from the semi-regulated markets grew by a healthy 29% YoY during the quarter driven by the CIS, Africa and Asia-Pacific. Revenues from India grew by 17% YoY and were aided by the dermatology, respiratory and cardiovascular segments. The company launched 3 new products in the domestic region during the quarter.

  • Revenues from the European region clocked a splendid 335% YoY growth. Besides its presence in the Czech Republic through the acquisition of Medicamenta, the company started operations in Poland and Romania. The growth in revenues was largely attributed to the acquisition of products in Poland. Further, the Polish subsidiary has also lined up 4-5 product launches by the end of FY09 in the cardiovascular and CNS segments. Overall the company expects the Central and Eastern European region to be the key growth driver as far as its European operations are concerned. In this regard, Glenmark is actively pursuing in-licensing opportunities and introduction of its own products, which are currently under registration.

  • Operating margins, on a consolidated basis, contracted by 1.6% during 2QFY09, largely due to a rise in raw material and staff costs (as percentage of sales). Strong performances at both the topline and the operating level, buoyant other income and lower interest costs resulted in the superlative 56% YoY growth in the bottomline.

What to expect?
    At the current price of Rs 259, the stock is trading at a multiple of 6.2 times our estimated FY11 earnings (excluding the out-licensing deals). Glenmark’s presence in the regulated markets, especially the US, has been gaining scale and the company’s strategy of increasing focus on niche products besides ramping up product filings is expected to give a further boost to its US generics business going forward. Similarly, the company has embarked on a strategy of increasing its presence in the Latam and semi-regulated markets as well, which will further drive topline growth. Thus, the international business is expected to gain significant traction going forward.

    Despite having a stronger R&D pipeline as compared to its peers and Glenmark’s success in bagging out-licensing deals for the same, the company has been facing setbacks in this field. The first one was the German company Merck choosing not to develop Glenmark’s anti-diabetic molecule ‘Melogliptin’ as the former was undertaking a restructuring of its product portfolio. The recent development was Eli Lilly opting to discontinue development on Glenmark’s molecule GRC 6211 (for the treatment of osteoarthritis and neuropathic pain). The management had cited the receipt of milestone payments of US$ 69 m from all its out-licensing deals each year till FY10.

    Investors should note that while we had valued the core business (excluding the out-licensing deals) on a price to earnings basis, we valued the out-licensing deals on a DCF method and had assumed that the company’s milestone payments every year till FY11 would be US$ 69 m. This had resulted in a value of Rs 28.4 per share for the out-licensing deals. In light of the recent developments, after downgrading the estimated revenues from these deals, the value per share works out to be Rs 15.5 per share, implying a 2% reduction in our target price. Despite this, we maintain our positive view on the stock.

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