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Glenmark: All round growth

Oct 31, 2006

Performance summary
Glenmark Pharma reported a robust set of numbers for the second quarter and half year ended September 2006. For the quarter, topline grew at a healthy double-digit pace led by strong revenue growth in the international markets. Operating margins (on a standalone basis) improved considerably on account of a fall in staff costs and SG&A expenses (as a percentage of sales). This, combined with the higher other income, contributed to the healthy growth in bottomline.

Financial performance: Standalone snapshot
(Rs m) 2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
Net sales 1,256 1,963 56.3% 2,345 3,260 39.0%
Expenditure 1,015 1,493 47.1% 1,956 2,595 32.7%
Operating profit (EBIDTA) 241 471 95.0% 390 665 70.8%
Operating profit margin (%) 19.2% 24.0%   16.6% 20.4%  
Other income 8 17 121.3% 19 42 121.9%
Interest 16 46 184.4% 27 82 207.9%
Depreciation 45 61 35.3% 89 117 31.2%
Profit before tax 187 380 102.9% 293 508 73.6%
Tax 49 60 22.0% 44 88 101.5%
Profit after tax/ (loss) 138 321 131.5% 249 421 68.7%
Net profit margin (%) 11.0% 16.3%   10.6% 12.9%  
No. of shares (m) 118.6 118.7   118.6 118.7  
Diluted earnings per share (Rs)*         7.1  
P/E ratio (x)*         58.2  
(* 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 2QFY07?
International business is gaining traction: Glenmark's topline on standalone and consolidated bases grew by 56% YoY and 65% YoY respectively during the quarter. This was led by superlative performance of its formulations business in the US, Latin America and Rest of the World (ROW) markets. The performance in the US markets was driven by the ramp up in the number of products. Glenmark launched three products during the quarter namely, ‘Meloxicam', Codeine Phosphate' and ‘Gabapentin' taking the total number of products in the US market to 10. Glenmark and its partners currently have 25 products pending US FDA approval and expect to end the year with 18 to 22 ANDAs in the market.

In Latin America, the Brazilian and Argentinean markets mainly contributed to the topline, resulting in a 163% YoY growth in revenues. Glenmark filed 13 new dossiers with various regulatory bodies in Latin America during the quarter and received approval to market 4 products.

Consolidated business snapshot
(Rs m) 2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
US 60 338 460.5% 82 569 594.6%
Latin America 102 268 162.5% 239 453 89.4%
Rest of the World (ROW) 289 525 81.5% 462 909 96.9%
India 838 1,108 32.2% 1,711 1,970 15.1%
Total formulations 1,290 2,240 73.6% 2,494 3,900 56.4%
API 258 317 23.0% 445 572 28.7%
Out-licensing revenues - -   263 -  
Total 1,548 2,557 65.2% 3,201 4,473 39.7%

India – Strong recovery: Revenues from the domestic formulations business grew by a robust 32% YoY during the quarter largely driven by launch of new products and line extensions.

API picture: The API segment posted a robust 23% YoY growth in revenues owing to a 32% YoY growth in export sales to the regulated and semi-regulated markets. In the US, Glenmark filed 4 DMFs during the quarter and is looking to file 12 to 14 DMFs in FY07.

Out-licensing revenues: While Glenmark's molecule ‘Oglemilast' has entered Phase II clinical trials, triggering the next milestone payment of US$ 30 m, it has yet to receive the same. The company expects to receive the payments in FY07.

What to expect?
At the current price of Rs 413, the stock is trading at a price to earnings multiple of 58.2 times its trailing twelve-months earnings (on a standalone basis). 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, which is likely 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 Latin American and semi-regulated markets as well, which will further drive topline growth. On the R&D front, with ‘Oglemilast' moving into Phase II clinical trials, 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. Glenmark has recently signed an agreement with Merck KgaA for out-licensing the former's anti-diabetic molecule GRC 8200. Glenmark is expected to receive milestone payments for the same, the total value of which could be 190 m euros. This includes an up-front payment of 25 m euros. 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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