We have recently met the management of Glenmark Pharma (Glenmark) in order to get an update on its business progress in various markets and its R&D pipeline. The key highlights of the meet are detailed below:
Pick up in ANDA approvals and FTF opportunities to drive US sales growth in FY15: Glenmark’s US generics business to see a smart recovery in FY15 led by pick up in ANDA approvals and limited competition product opportunities like Vanos, Lunesta, etc. In fact, ~15 out of its total 63 pending ANDAs have already crossed 30 months after their filling. More so, FY16 will be benefitted from limited completion drug opportunities like generic Tarka, Ortho Tri-Cyclen Lo, Azelaic acid, etc and the stepped up filling of ANDAs with larger focus on differentiated generics. We expect its US generics to grow at 19% CAGR over FY14-FY16 to $419mn in FY15 and $502mn in FY16.
Domestic formulations to see 18% CAGR over FY14-16: Glenmark’s domestic business (25% of total sales) maintained its outperformance by delivering a growth 19% against the industry growth of 7-9% in 9MFY14. We believe Glenmarks’s focused marketing of derma, respiratory, cardiac and gynaecology drugs would help it grow ahead of industry going ahead. We estimate Glenmark’s domestic formulation sales to post 18% over FY14‐16 to Rs 20.79bn.
Estimates core earning CAGR of 27% over FY14-16: Glenmark to see steady improvement in its EBITDA margins led by – 1) pick up in ANDA approvals, 2) increasing share of limited competition/ complex generics, 3) turnaround in European operation in Q3FY14 and 4) improving productivity in Emerging and Latin American markets. We estimate Glenmark’s core EBITDA to expand from 21.6% in 9mFY14 to 22.8% in FY16, resulting in PAT CAGR of 27% over FY14‐16E to Rs 11.35bn.
Multiple milestone receipts from R&D pipe line on the cards: GRC 15300 and GBR 500 are currently under Phase II proof-of-concept study and the trial data outcome which are expected during FY15. This could earn larger milestone receipts in the near term. Likewise, Glenmark’s another neuropathic pain/respiratory disorder molecule – GRC 17536 that is undergoing phase II trials in Europe is a potential candidate for out-licensing.
Upgrade to conviction BUY with upward revised target price of Rs 744: At the CMP of RS 580, the stock trades at 13.9x its FY16E EPS and 8.8x its FY16 EV/EBITDA, which is over 20% discount to its peer’s valuation and its own 5-year historic average valuation. We believe the discount is largely due to moderated earning growth led by accelerated amortization of intangibles and lack of big ticket US launches.
However, with the anticipated pick up in ANDA approvals in FY15, value growth led by rising share of complex generics (over 75% of its pending ANDAs are differentiated generics) and likely milestones from its R&D pipeline would bridge the valuation gap soon.
We value Glenmark’s core business at Rs 710 (17x its FY16 EPS) and its R&D pipeline of Crofelemer and GRC 15300 at Rs 34/share. Our target price of Rs 744 implies an upside of 29% from current levels.
BUY
BIOS IN | CMP RS 580
TARGET RS 744 (+29%)
Company Data
O/S SHARES (MN) : / 271MARKET CAP (RSBN) : / 157
MARKET CAP (USDBN) : / 2.6
52 - WK HI/LO (RS) : / 612 / 471
LIQUIDITY 3M (USDMN) : / 5.7
FACE VALUE (RS) : / 1
Share Holding Pattern, %
PROMOTERS : / 48.3FII / NRI : / 33.6
FI / MF : / 7.5
NON PROMOTER CORP. HOLDINGS : / 1.5
PUBLIC OTHERS : / 9.1
Price Performance, %
1mth / 3mth / 1yrABS / 5.7 / 4.8 / 23.7
REL TO BSE / 4.4 / -4.6 / 6.3
Price Vs. Sensex (Rebased values)
Source: Bloomberg, Phillip Capital Research
Other Key Ratios
Rs mn / FY14E / FY15E / FY16ENet Sales / 59,847 / 69,994 / 82,627
EBIDTA / 12,810 / 15,472 / 18,843
Net Profit / 6,965 / 8,743 / 11,287
EPS, Rs / 25.7 / 32.3 / 41.7
PER, x / 22.6 / 18.0 / 13.9
EV/EBIDTA, x / 13.8 / 11.2 / 8.9
P/BV, x / 4.8 / 3.9 / 3.1
ROE, % / 21.3 / 21.4 / 22.0
Debt/Equity (%) / 84.5 / 62.9 / 45.0
Source: Phillip Capital India Research
Surya Patra (+ 9122 6667 9768)
Please refer to Disclosures and Disclaimers at the end of the Research Report.
Please refer to Disclosures and Disclaimers at the end of the Research Report.
Likely pick up in ANDA approvals and FTF opportunities to drive US sales growth
Glenmark’s US generics business (36% of total sales) sees weakest ever performance of about 12% during FY14 after growing at a CAGR of 27% in constant currency over FY10-FY13. This was mainly led by delay in drug approval by USFDA resulting limited ANDA approvals during FY13 and FY14 (as shown in the adjacent table).
Limited ANDA final approvals during FY13-FY14 moderated growth in recent times; Pick up in drug approval and stepped up ANDA fillings to ensure ~19% growth in US generics in constant currency
Source: Company, PhillipCapital India Research
Going ahead, we expect a smart recovery in Glenmark’s US generics business in FY15 led by pick up in ANDA approvals and limited competition product opportunities like Vanos ($107mn opportunity with 3-4 competitors), Lunesta ($850 mn opportunity), etc. In fact, ~15 out of its total 63 pending ANDAs have already crossed 30 months after their filling.
More so, FY16 will be benefitted from limited completion drug opportunities like generic Tarka, Ortho Tri-Cyclen Lo, Azelaic acid, etc and the topical gel and stepped up filling of ANDAs with larger focus on differentiated generics.
During FY14, Glenmark filed 20 ANDAs (~15 are complex generics) and expects to file 25 ANDAs in FY15. Most of these filings are in the niche therapy segment of dermatology, injectable, etc. which would lead to a healthy growth for Glenmark FY16 onwards. Incidentally, 75% of their pending ANDA pipelines are differentiated generics and would drive value growth for the company going ahead. We expect its US generics to grow at 19% CAGR over FY14-FY16 to $419mn in FY15 and $502mn in FY16.
Domestic formulations continue to outpace industry growth
Glenmark’s domestic formulations business (25% of total sales) maintained its outperformance by delivering a growth 19% against the industry growth of 7-9% in 9MFY14. We believe Glenmarks’s focused marketing of Derma, respiratory, Cardiac and gynaecology drugs would help it grow ahead of industry growth going ahead. The company was marginally impacted by the implementation of new pricing policy and with the stabilisation of trade issues we estimate Glenmark’s domestic formulation sales to report a compounded annual growth of 18% over FY14‐16 to Rs 20.79bn.
Glenmark outperforms domestic formulations industry growth.....Domestic formuations to report 18% CAGR over FY14-16
Source: Company, PhillipCapital India Research
Europe and Emerging markets to deliver healthy growth
Europe and emerging markets (including countries like – Africa, Asia, CIS region and Latin America account about 30% of consolidated sales) reported 17% YoY growth in 9mFY14. Going ahead the management is confident to deliver stronger growth of over 20% in the said markets led by new product launches, larger focus on branded business and deeper penetration. More importantly, Glenmark’s European operation became EBITDA positive in Q3FY14, which will drive value growth going ahead.
Pick up in ANDA approvals and focus on niche products ensures steady margin expansion
Glenmark management guides for a steady improvement in its EBITDA margins led by – 1) pick up in ANDA approvals, 2) increasing share of limited competition/ complex generics, 3) turnaround in European operation in Q3FY14 and 4) improving productivity in Emerging and Latin American markets. We estimate Glenmark’s core EBITDA to expand from 21.6% in 9mFY14 to 22.8% in FY16, resulting in 21% CAGR in its cooperating profits over FY14-16E.
Steady progress in financial health
Considering the recent Rupee strengthening against US$, we have reworked our FY15/16 estimates based on US$ assumption of Rs 60/$ (v/s Rs 61/$ earlier).
As per our revised estimates, we expect Glenmark to report revenue CAGR of 18% and PAT CAGR of 27% over FY14‐16E to Rs 82.9bn and Rs 11.35bn, respectively. Led by judicious capital expenditure and strong earnings growth, we expect Glenmark to generate healthy >Rs 10 bn over FY14-FY16 that would ultimately strengthen the balance sheet health of the company.
Improving product mix, steady margin expansion and continued financial deleveraging to report 27% CAGR in Adj. PAT over FY14-16E
Source: Company, PhillipCapital India Research
Change in Estimates to factor lower Re/US$ of Rs 60 against earlier assumption of Rs 61 for FY15E and FY16E
Revision in Estimates / Old Est. / Revised Est. / % RevisionFig. Rs mn / FY15E / FY16E / FY15E / FY16E / FY15E / FY16E
Revenue / 71607 / 86136 / 70009 / 82642 / -2.2 / -4.1
EBITDA / 15754 / 19639 / 15472 / 18842 / -1.8 / -4.1
EBITDA Margin% / 22 / 22.8 / 22.1 / 22.8
Core PAT / 9245 / 11915 / 8743 / 11287 / -5.4 / -5.3
EPS / 34.1 / 44.0 / 32.3 / 41.7 / -5.4 / -5.3
Source: Company, PhillipCapital India Research
Judicious discovery R&D spend and progressing new drug pipeline could surprise with multiple and larger milestone receipts
Glenmark, in order to enhance the productivity of its discovery research, has judiciously capped the R&D spend on it in the range of US$ 35-40mn per annum (i.e ~45% total R&D spend) and now focuses on a limited number of potential NCE/NBE candidates (although it has developed a larger library of preclinical candidates).
On the other hand, three of its discovery R&D pipeline including – GRC 15300, GBR 500 and GRC 17536 has already progressed into phase II clinical development which could surprise with multiple and larger milestone receipts in the medium-term.
In fact, GRC 15300 (Osteoarthritis/neuropathic pain molecule) and GBR 500 (multiple sclerosis mole), which are already out-licensed to Sanofi are currently under Phase II proof-of-concept study. The trial data outcomes for these molecules are expected during FY15 and could earn larger milestone receipts. It’s another neuropathic pain/respiratory disorder molecule – GRC 17536 is undergoing phase II trials in Europe and India is a potential candidate for out-licensing.
Glenmark expects multiple Monetization activity over next 12months from its R&D Pipeline
Crofelemer / Anti-diarrheal / In-licensed from
Napo / Partner Salix got USFDA approval and launched in US. Glenmark progresses its filling in 140 emerging markets. / Expect launch in emerging market during early FY15
GRC 15300 / Osteoarthritis pain, Neuropathic pain / Sanofi-Aventis / Completed Phase I trials in the UK, A PhIIa proof of concept (POC) study in neuropathic pain, initiated in Q1 FY 2013.
Globally, this is the only reported TRPV3 specific antagonist molecule to enter clinical trials / POC data outcome expected in 2-3 quarter time
GRC 17536 / Neuropathic pain, Respiratory disorders / Glenmark is currently doing Phase II proof of concept study in pain indication in Europe and India. Additionally, initiated a Phase I/IIa study for respiratory indications in the UK (MHRA). Glenmark has also obtained regulatory approval from MHRA, UK, for the conduct of a Phase IIa study in patients with chronic cough. / Potential candidate for outlicensing
GBR 500 / Crohn's Disease, Multiple Sclerosis, Inflammatory Disorders / Sanofi-Aventis / Ph II proof of concept study in ulcerative colitis has been initiated in Q2 FY 2012-13 in US. / Expect data outcomes in H1 FY15
GBR 900 / Pain / In –licensed from
Lay Line
Genomics / Phase 1 enabling toxicity studies for GBR 900 have been completed successfully. Initiates Phase I study in the current financial year.
m-PGES-1
inhibitor / Chronic inflammatory conditions including pain / Option agreement
With Forest Lab / Glenmark has identified clinical candidates and is currently conducting pre-clinical studies and other development activities required to support the initiation of first-in-human dosing
Upgrade to conviction BUY with upward revised target price of Rs 744
At the CMP of RS 580, the stock trades at 13.9x its FY16E EPS and 8.8x its FY16 EV/EBITDA, which is over 20% discount to its peers valuation as well as its own 5-year average valuation.
We believe the discount is largely due to moderated earning growth led by accelerated amortization of intangibles and lack of big ticket US launches. However, with the anticipated pick up in ANDA approvals in FY15, all-round value growth in various markets supported by more complex generics and likely milestones from its R&D pipeline would bridge the valuation gap soon.
Considering its focus on quality product pipeline (over 75% of its pending ANDAs are differentiated generics) we value Glenmark’s core business at Rs 710 (17x its FY16 EPS) and its R&D pipeline of Crofelemer and GRC 15300 at Rs 34/share. Our target price of Rs 744 implies an upside of 29% from current levels.
1yr forward P/E 1yr forward EV/EBITDA
Source:
Financials
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