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Glenmark Pharma: Scaling new heights

Ujjval Jauhari/Mumbai 13 Jul 12 | 12:38 AM
 Glenmark Pharmaceuticals Ltd

BSE   22 Jun 18 | 12:00 AM

599.85  -1.9 (-0.32%)

NSE   22 Jun 18 | 12:00 AM

599.85  -2.2 (-0.37%)

Glenmark Pharmaceuti-cials rose to a 52-week high of Rs 406.40 on Wednesday, marking a 30 per cent return in the current financial year. Strong growth in the domestic market, strong business in the US, profitable emerging market operations and easing debt concerns led to the rise.

Analysts are increasingly bullish on the stock. According to Bloomberg data, of the 41 analysts polled, 31 had 'buy' ratings, seven were neutral and only three had 'sell' ratings. After the results for the quarter ended March, analysts had upgraded their one-year target prices to Rs 400 levels for the stock. Recently some had further upgraded it to Rs 465-500, owing to the improving outlook and growth visibility. This indicates an upside of 20-29 per cent for the stock, which closed at Rs 388.80 on the Bombay Stock Exchange on Thursday.

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Robust domestic growth
Domestic branded formulation sales in India contributed about 25 per cent to Glenmark's overall revenue in the quarter ended March, rising 38.3 per cent year-on-year. These rose at an equally brisk pace in the quarter ended June as well. The growth, according to analysts, is led by the acute segment (about 60 per cent of the total domestic portfolio), which had remained subdued last year. Analysts say the trend is likely to continue. The chronic segment, too, is faring well. According to a sector report, in May, Glenmark's chronic segment grew 58 per cent.

In Rs crore FY12 FY13E FY14E
Revenue 3,889 4,618 5,361
Y-o-Y change (%) 31.9 18.7 16.1
Ebitda 714 936 1,090
Ebitda (%) 18.4 20.3 20.3
Net profit 460 620 756
Y-o-Y change (%) 1.6 34.7 21.9
EPS (Rs) 19.3 22.3 27.3
PE (x) 20.2 17.4 14.2
E: Estimates                            Source: Nirmal Bang Institutional Equities

Praful Bohra at Nirmal Bang Securities attributes the strong overall domestic growth to the recently-concluded restructuring in the domestic market, led by a change in the product and marketing mix, pricing and promotion strategies and the addition of 700 people to the company's field force in 2011-12. He feels this would drive domestic growth and estimates an 18 per cent compounded annual growth in revenue during 2012-14.

Analysts at Nomura expect domestic revenues to rise 20 per cent year-on-year. They add secondary sales data reported by AIOCD AWACS indicate strong momentum in growth. Over the past three months, secondary sales (distributors to chemists) recorded 29-37 per cent growth.

The growth would have been higher, but for the New Pharmaceutical Pricing Policy (NPPP). Glenmark's management expects a two to five per cent impact on domestic revenue due to the NPPP. Balaji Prasad at Barclays, too, feels domestic revenue could be impacted up to five per cent by potential changes in the pricing policy. He, however, adds, "Depending on the final pricing changes implemented, impact could vary widely."

US business on a strong footing
Glenmark’s strategy in the US has had lower dependence on drugs going off-patents and more towards niche and speciality products like oral contraceptives, dermatology, oncology and controlled substances. Oral contraceptives now account for 14 per cent of US base revenue, according to IMS data. In their report, Nomura analysts state oral contraceptives recorded 12 per cent growth month-on-month in May. The strategy of depending on low-competition, niche products, controlled substances, etc, is likely to yield rich dividend. Analysts at Citi, in a report on Glenmark's portfolio, state the strong growth momentum would be sustainable.

There are multiple growth drivers for the US business, including the series of product launches planned. For instance, Imiquimod Cream (a dermatology product), with a market size of $250 million (a five to six player market) is scheduled to be launched in the quarter ended September. Malarone (anti-malarial) is seeing extended marketing exclusivity, owing to the absence of generic filers.

Bohra says though the management expects US revenue to grow 20 per cent year-on-year on a constant currency basis (rupee depreciation would be an added benefit), he believes this is conservative. Instead, he estimates a 23 per cent year-on-year growth in 2012-13.

Glenmark's businesses in emerging markets like Brazil have achieved breakeven in 2011-12, a positive for long term growth. European formulations and generic sales, contributing about ten per cent to revenues, are growing very fast, partly due to the low base. Given these markets have achieved the critical scale, analysts expect a visible improvement in profitability from this year.

Easing concerns
Glenmark has been growing well with a differentiated business model. It is also present in NCE (new chemical entity) research, with five out-licensed NCEs. Its out-lisensing income stood at $207 million. Though Glenmark has seen a few failures on the NCE front, analysts haven't accorded any value to this business. Hence, any breakthrough would be a trigger.

Another key improvement is the company's working capital needs. To fund growth and research activities, Glenmark had seen high working capital requirement. In 2011-12, its net working capital fell to 128 days, compared with 168-200 days for 2010-11. It is likely to remain at these levels. Analysts at Motilal Oswal Securities say improved working capital and moderate capital expenditure would give the company's management flexibility to target debt reduction. They expect a fall in net debt during the FY13-FY14 period, resulting in the debt-equity ratio improving one to 0.4-0.5 times by FY14.

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