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Glenmark Pharma: Double whammy!
Dec 23, 2005

Performance Summary
Glenmark Pharma’s second quarter and half year ended September 2005 results were disappointing. Topline during the quarter received a severe beating on the back of heavy monsoons in Maharashtra and the consequent flooding of the company’s warehouses. This coupled with a considerable contraction in operating margins dented the bottomline, which was down 52% YoY.

Financial performance: A snapshot
(Rs m) 2QFY05 2QFY06 Change 1HFY05 1HFY06 Change
Net sales 1,504 1,247 -17.1% 2,407 2,381 -1.1%
Expenditure 1,027 1,005 -2.1% 1,749 1,991 13.8%
Operating profit (EBIDTA) 477 241 -49.4% 658 390 -40.8%
Operating profit margin (%) 31.7% 19.4%   27.3% 16.4%  
Other income 10 8 -22.3% 32 19 -40.5%
Interest 36 16 -55.4% 74 27 -64.2%
Depreciation 33 45 35.8% 66 89 35.1%
Profit before tax 417 187 -55.0% 550 293 -46.7%
Tax 128 49 -61.6% 163 44 -73.2%
Profit after tax/ (loss) 289 138 -52.2% 387 249 -35.6%
Net profit margin (%) 19.2% 11.1%   16.1% 10.5%  
No. of shares (m) 59.3 118.6   59.3 118.6  
Diluted earnings per share (Rs)* 2.4 1.2   6.5 4.2  
P/E ratio (x)         72.5  
(* annualised)            

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 formulations business contributed about 50% to the company's revenue in FY05. 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 2QFY06?
Dismal topline performance: Heavy monsoons in Maharashtra severely affected the company’s performance in 2QFY06, as it witnessed a 17% YoY decline in revenues. Domestic formulations rose by a mere 1% YoY on the back of damage to the company’s inventory in its warehouse on account of the rains and therefore the inability to supply adequate quantities of formulations to the distribution partners.

Similarly, the domestic API revenues dipped by a huge 33% YoY. This was because Glenmark deployed its API capacity towards captive API supplies thereby affecting API supplies to external customers during the quarter. Exports also fell by 27% YoY. However, it must be noted that in 2QFY05, the company received Rs 184 m on sale of its new chemical entity (NCE) for asthma to its wholly owned Swiss subsidiary. If one were to exclude this from 2QFY05 revenues, the exports have actually grown by 10% YoY.

Standalone business snapshot
(Rs m) 2QFY05 2QFY06 Change 1HFY05 1HFY06 Change
India formulations 833 838 0.6% 1,370 1,711 24.9%
India API & co-marketing 227 152 -33.3% 462 283 -38.8%
Exports from India 542 394 -27.4% 757 638 -15.7%
Total 1,603 1,384 -13.7% 2,588 2,632 1.7%

Huge margin contraction: A strong rise in staff costs and sales expenses (as percentage of sales) and the shrinkage in topline were reflected in operating margins, which fell by 12% during the quarter. The company also attributed the contraction in margins to the continued impact of the MRP-based excise duty on formulations sold in the domestic market.

Cost break-up
(% of sales) 2QFY05 2QFY06 1HFY05 1HFY06
Raw material cost 33.8% 29.2% 31.7% 33.7%
Staff cost 9.3% 13.6% 11.6% 15.0%
Selling, operating & other expenses 25.2% 37.8% 29.4% 34.9%

Bottomline not spared either: The double impact of a shrinkage in revenues coupled with the pressure on operating margins hit the bottomline, which fell by 52% YoY. Even decline in tax, depreciation and interest costs could not help the cause.

What to expect?
At the current price of Rs 305, the stock is trading at a price to earnings multiple of 72.5 times its annualised 1HFY06 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. The company’s R&D initiatives is also likely to stand it in good stead in light of the patent regime in the country. Glenmark has already out-licensed its lead molecule for asthma to Forest Labs, US and Teijin Pharma, Japan in return for which, it has received milestone payments and is on the lookout for a European partner as well. However, while R&D activities are fraught with risks (a molecule could be discontinued at any stage if the clinical trial data does not report positive findings), Glenmark’s effort on the R&D front is a positive move.

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