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Glenmark: Exciting times ahead? - Views on News from Equitymaster
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Glenmark: Exciting times ahead?
Dec 28, 2005

Glenmark Pharma has lately been in the news on the back of progress made in the development of its new molecule for asthma and out-licensing of the same in return for milestone payments. In this article, we take a look at the company’s past performance and what lies for it in the future.

Company background
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.

A look at the numbers
  FY02 FY03 FY04 FY05 CAGR (%)
Net sales (Rs m) 2,179 3,125 3,242 5,406 35.4%
Net sales growth (%)   43.4% 3.8% 66.7%  
Operating profit (Rs m) 441 629 691 1,558 52.3%
Operating profit margin (%) 20.3% 20.1% 21.3% 28.8%  
Operating profit growth (%)   42.5% 9.9% 125.5%  
Net profit (Rs m) 228 326 413 1,072 67.6%
Net profit margin (%) 10.5% 10.4% 12.8% 19.8%  
Net profit growth (%)   43.0% 26.9% 159.3%  

Going back in time
Domestic scenario: In the domestic market, Glenmark is a very strong player in the dermatology segment (34% of sales in FY05), the market leader being Glaxo. New product launches and replacement of older therapies has enabled the company to consistently beat the industry growth rate. Also, the company, over the years has progressively reduced its focus on dermatology by venturing into the lifestyle segment, which is one of the fastest growing segments in the world as well as in India. This can be gauged by the fact that in FY98, while dermatology accounted for 49% of sales, the contribution has come down to 33% in FY05, paving the way for newer therapy areas such as cardiology (4%), diabetes (8%) and pain management (13%).

Going the international way: Despite Glenmark’s strong focus on the domestic market (50% of sales), the contribution has significantly come down from around 86% in FY02. This is due to the company’s increasing focus on the international markets. Glenmark started its international foray by concentrating on the semi-regulated markets of Africa, Asia, Latin America, Russia and the CIS countries.

Glenmark’s presence in the regulated markets of the US and Europe is, however, still in its nascent stages. However, the company has made significant strides in the Brazilian market by acquiring a Brazilian company Klinger in FY04 having 21 approved product registrations. As far as the US market is concerned, the company is looking to establish a presence in the generics space by entering into collaborations with local players. These initiatives gathered momentum in the past four years enabling the company clock a 35% CAGR growth.

Margin story: Glenmark has consistently maintained margins at near 20% levels in the past four years. While raw material and staff costs (both as a percentage of sales) have declined, R&D expenditure has risen. This is due to increased activity by Glenmark on developing new molecules. It must be noted that margins significantly improved to around 28% in FY05. While a reduction in operating costs (as a percentage of sales) was a major factor, the receipt of milestone payments to the tune of US$ 20 m in FY05 also aided the margin expansion.

Cost breakup
(% of sales) FY02 FY03 FY04 FY05
Material cost 41.1% 37.0% 31.9% 30.2%
Staff cost 12.2% 12.3% 14.5% 11.7%
Other manufacturing costs 1.2% 2.6% 2.3% 3.5%
Advertising & selling costs 7.0% 7.0% 5.8% 4.8%
Administrative costs 14.7% 16.3% 16.5% 15.1%
R&D expenditure 3.6% 4.7% 7.7% 6.0%

R&D is making progress: Glenmark has made a significant progress in its R&D endeavours. The company’s lead candidate for asthma GRC 3886 (‘Oglemilast’) successfully completed Phase I clinical trials. The company has adopted the strategy of licensing out its compounds to partners for regulated markets. Accordingly, it entered into an agreement with the US-based company Forest Laboratories for the development of ‘Oglemilast’ for the North American market involving cumulative milestone payments to the tune of US$ 190 m upto the time the molecule is commercialized. Glenmark already received US$ 20 m in FY05 aiding the 60% YoY growth in the topline. It is expected to further receive US$ 30 m by the time Phase II commences. Phase II clinical trials are expected to begin in early 2006.

Glenmark entered into a similar outlicensing arrangement with Teijin Pharma for the Japanese market and is on the lookout for a European partner as well. Glenmark has also identified molecules in the diabetes and CNS segments, which are currently undergoing pre-clinical testing.

What to expect?
At the current price of Rs 298, the stock is trading at a price to earnings multiple of 70.8 times its annualised 1HFY06 earnings, which is stretched. Glenmark’s presence in the regulated markets of the US and Europe is in its nascent stages. However, the company 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 are also likely to stand it in good stead in light of the patent regime in the country.

As mentioned earlier, Glenmark has already out-licensed its lead molecule for asthma to the US-based company Forest Labs and the Japanese company Teijin Pharma in return for which, it has received milestone payments. 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 this front is a positive.

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