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Glenmark: The growth pace continues
Nov 6, 2007

Performance summary
  • Revenues grow by 52% 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 28% YoY.

  • EBDITA margins expand by 7.3% due to a considerable reduction in raw material and staff costs (as percentage of sales).

  • Net profits grow by 87% YoY, led by the strong performance at the operating level and despite higher tax, interest and depreciation expenses.

Financial performance: Consolidated snapshot
(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Net sales 2,469 3,749 51.8% 4,299 7,263 68.9%
Expenditure 1,869 2,565 37.3% 3,377 5,054 49.7%
Operating profit (EBIDTA) 601 1,184 97.0% 922 2,209 139.6%
Operating profit margin (%) 24.3% 31.6%   21.4% 30.4%  
Other income 29 53 84.1% 73 77 5.6%
Interest 87 158 82.4% 157 302 92.5%
Depreciation 98 162 64.7% 184 305 65.8%
Profit before tax 444 916 106.2% 655 1,679 156.6%
Tax 42 165 289.0% 66 357 442.0%
Profit after tax/ (loss) 402 751 86.9% 589 1,323 124.7%
Net profit margin (%) 16.3% 20.0%   13.7% 18.2%  
No. of shares (m) 237.4 243.9   237.4 243.9  
Diluted earnings per share (Rs)*         9.2  
P/E ratio (x)*         52.7  
(* 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 2QFY08?
US and Latin America propel the topline: Glenmark’s topline on a consolidated basis grew by 52% YoY during 2QFY08 led by superlative performance of its formulations business in the US, Latin America and India. Revenues from the US markets ballooned by 140% 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 3 products taking the total number of products launched in the US market to 20. The company filed 4 ANDAs during the quarter and the management contends that it is on track to file 21 ANDAs in FY08. With this, Glenmark now has over 35 ANDAs undergoing FDA approval. Besides this, Glenmark has filed a total of 4 potential first to file Para IV challenges so far, three of which are ‘Desloratidine’, ‘Exetimibe’ and ‘Atomoxetine’. Of these three, if successful, Glenmark could be the only company to have the 180-day exclusivity on ‘Exetimibe’.

In Latin America, the Brazilian and Argentinean markets mainly contributed to the topline, resulting in a 113% YoY growth in revenues. The company is also present in 10 other Latin American countries. As far as Brazil is concerned, the company filed 7 new dossiers during the quarter and is on track to file 25 dossiers during FY08 and launch 18 products. In Argentina, 6 new dossiers were filed during the quarter. The company has been focusing on the oncology space in the Latin American markets and launched 17 products in various markets. The semi-regulated markets (SRMs), however, performed poorly, recording a staid growth of 4% YoY during the quarter.

Consolidated business snapshot
(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
US 338 811 139.9% 569 1,637 187.7%
Latin America 268 572 113.1% 453 1,124 148.3%
Semi regulated markets (SRM) 525 545 3.8% 909 991 9.1%
Europe - 68   - 161  
India 1,108 1,418 28.0% 1,970 2,699 37.0%
Total formulations 2,240 3,414 52.4% 3,900 6,613 69.5%
API 317 426 34.2% 572 821 43.4%
Total 2,557 3,839 50.2% 4,473 7,434 66.2%

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 68 m during the quarter. As regards its agreement with Merck Generics, both Glenmark and Merck completed the development of another product and jointly submitted the product dossier for review by regulatory agencies in multiple European markets by the decentralized procedure.

India – Strong show: Revenues from the domestic formulations business grew by a robust 28% 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 12 new products during the quarter.

API picture: Revenues from the API segment grew by a healthy 55% YoY largely led by the domestic market, which posted a 66% YoY growth. However, the exports API segment performed poorly with revenues from the international markets (including both the regulated and the semi regulated markets) recording a fall of 6% YoY.

Sharp margin expansion: Operating margins, on a consolidated basis, improved substantially by 7.3% during the quarter largely due to a steep reduction in raw material and staff costs (as percentage of sales). An improved product mix, ramp up in product launches and focus on branded markets also played their parts in boosting the margins.

Consolidated cost breakup
(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Raw material consumption 488 455 -6.8% 795 1,099 38.2%
(% of sales) 19.8% 12.1%   18.5% 15.1%  
Purchase of traded goods 319 573 79.8% 583 913 56.6%
(% of sales) 12.9% 15.3%   13.6% 12.6%  
Staff cost 377 503 33.4% 726 1,007 38.7%
(% of sales) 15.3% 13.4%   16.9% 13.9%  
Other expenditure 685 1,034 51.0% 1,273 2,035 59.9%
(% of sales) 27.7% 27.6%   29.6% 28.0%  

Bottomline bloats: Strong performances at both the topline and the operating level and higher other income led to the superlative 87% YoY growth in the bottomline during the quarter. This robust growth was attained despite higher tax, interest and depreciation expenses.

What to expect?
At the current price of Rs 495, the stock is trading at a multiple of 26.5 times our estimated FY10 earnings (excluding the in-licensing deals). 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 for milestone payments worth Euro 190 m. Further, Glenmark was recently successful in out-licensing its third molecule GRC 6211 for pain management to Eli Lilly for potential milestone payments worth US$ 350 m. 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. While we are positive about the growth prospects of the company, we believe that the risk-reward ratio is skewed to towards the former and hence we maintain our negative view on the stock.

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