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Research Report On Glenmark Pharmaceuticals Limited


September 3, 2010

!"en#ar$ P%ar#aceutica"&

Ticker, - GLEN$AR' Price, - *01

Earnings/Share Jun. 2008A 2009A 2010A 2011E 4.01 2.2 0.21 2.24 Sept. 5.24 2.6 2.13 6.27 Dec. 11.86 1.4 1.39 6.57 Mar. 5.23 2.29 1.05 2.39

Rec.mmendati.n, - "u/ Price Tar2et, - )13

Year 26.34 8.7 4.78 17.47

P/E Ratio 11.4 23.1 23.2 20

$edicis Deal, GPL has entered into an out-licensing deal with Medicis, a US based Pharma Corporation, for co-de elopment and commerciali!ation for one of their "##S $for treatment of acne%& 's per the agreements of the deal, GPL will recei er US() mn upfront pa*ment and additional pa*ments upon achie ing certain de elopment milestones and ro*alt* upon commerciali!ation of the product& +n a separate de elopment, Glenmar, has entered into Para-+- settlement with Medicis for generic ersions of Lopro. gel and -anos cream& Under the agreement, Glenmar, will be able to mar,et and distribute generic ersion of -anos cream under license from Medicis as earl* as #ecember /012, or earlier in certain circumstances& +n addition, Glenmar, will ha e a license to launch a generic ersion of Lopro. gel immediatel*& -anos Cream has a total mar,et of 2) million dollars and Lopro. Gel has an annual mar,et of 1) million dollars in US& 3he abo e de elopments are positi e for the compan* but will ha e meaningful impact on the financials of the compan* onl* after /-2 *rs& In4Licensin2 Deal, Glenmar, Pharmaceuticals Ltd in-licensed a product for the +ndian mar,et as part of its effort to enter the fast-growing and high-potential 4Scar Management5 segment& Glenmar, entered into a strategic in-licensing agreement with the Swiss firm, Stratpharma 'G to mar,et and distribute the product 4Strataderm5 in +ndia& 3he entr* into the scar management therap* area will strengthen Glenmar,5s leadership position in the dermatolog* segment& 6stimated si!e of the scar and mar,s remo al cream in +ndia to be around Rs& 70 cr and growing at an e.ponential rate& U# Healthcare "ill, 8ith the (9:0-billion healthcare pac,age emphasi!ing on increased healthcare co erage and lower cost, there is a suppl* opportunit* for +ndia;s generic drug ma,ers& 3he bill promotes the use of generic drugs that are often one-tenth the price of the original ersion, but has the same impact& 'mong the 1: countries named in the
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Congress discussion that can offer low-cost drugs to achie e lower healthcare costs, +ndia and China were the onl* two that ha e enough scale to ser e the US mar,et& +ndia has the largest number of US <ood and #rug 'dministration appro ed pharma plants outside the US& "ud2et Im5act, 3he proposal of increase in weighted deduction on inhouse R=# e.penditure is positi e for the compan* as it can now get higher deduction of /00 > which earlier was 1)0 >& ?ut it gets partiall* offset b* increase in M'3 rates from 1) > to 17 >& 6uali7ied Instituti.nal Placement, +n September /009, Glenmar, raised Rs :12&)@ cr through a Aualified +nstitutional Placement $issued 1&7B cr shares at the rate of Rs //1 per share%, which was utili!ed to lower debt le els and other corporate purpose& 3his helped ,eep a tab on interest costs which grew B> to Rs 2@7 mn in the #ecember Cuarter $it was down nearl* /0> CoC%&

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In8estment #ummar/
#tr.n2 Gr.9th in Internati.nal $arkets, 3he Compan* has strong presence in both regulated as well semi-regulated mar,ets with around B0> of re enues coming from e.ports& Increasin2 ..t5rint in D.mestic $arkets, 3he Compan* follows the strateg* of targeting niche areas as a growth strateg* to penetrate in domestic mar,ets which enables the compan* in maintaining margins& +t is a leader in dermatolog* segment in domestic region and continues to be focused in the segment& #tr.n2 Research Ca5a:ilities, +t has a strong pipeline of @ "ew Chemical 6ntities $"C6s% and / "ew ?iologics 6ntities $"?6s% in arious stages of preclinical and clinical trials and has earned re enues of US(11)mn till now from R=# acti ities, highest e er earned b* an* +ndian compan*& Listin2 .7 Generics "usiness, GPL has re-organi!ed its generics business into a separate subsidiar* called Glenmar, Generics Limited $GGL%, which contributes around ::> of group5s re enues& +t has filed RDP and awaiting S6?+5s appro al for its +PO& Increasin2 Pr.7ita:ilit/ 8ia Restructurin2 "alance #heet, Compan* has ta,en arious steps li,e reducing debtor5s da* and debt on the boo,s to impro e the liCuidit*&

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3he re enues of the compan* is e.pected grow at a C'GR of 1)> o er a period of three *ears from /0116 to /0126 whereas net profit will grow at a higher C'GR of //&1:> during the same period, on account of balance sheet restructuring e.ercises, cost containment program and management of wor,ing capital c*cle& 3he compan* is e.pected to earn an 6PS of Rs& 1B&:B in <E116, Rs&19&7: in <E1/6 and Rs&//&): in <E126& 't the CMP of Rs& /7) per share, the stoc, is trading at a discount of 17&)B> from our intrinsic price of Rs& 2)0 per share which is /0. <E116 earnings& 8ith growth triggers li,e first-to-file opportunities, listing of its subsidiar* $not factored in our financials%, out-licensing deal for its "C6 $not factored in our proFections% the stoc, loo,s under alued& 3he recommendation is a ?UE rating on the stoc, with a price target of Rs 2)0 with a long term iew&

"usiness Descri5ti.n
Glenmar, Pharmaceuticals Limited $GPL% is a research-dri en, full* integrated pharmaceutical compan*& +ncorporated in the *ear 19BB, the Compan* is a leader in the disco er* of new molecules $both "C6s and "?6s% in +ndia& Glenmar, is among the few +ndian pharmaceutical pla*ers targeting new drug disco er* research& 8ith its global headCuarters in Mumbai, the pharmaceutical group has branded generic formulation mar,ets in o er 7) countries across the globe including +ndia, US, 6urope, ?ra!il, RussiaGC+S, 'frica and 'sia& 3he compan* focuses particularl* on de eloping proprietar* drugs $no el chemical entities and biological entities% as well as generic drugs across the categories of solid oral dose products, dermatological creams and ointments& 3he formulations business of the compan* spans se eral product segments such as #ermatolog*, +nternal Medicine, Respirator*, #iabetes, Pediatrics, G*necolog* and Oncolog*& +n +ndia, the compan* mar,ets about 100 moleculesGcombinations spanning o er a di erse set of therap* segments&

"usiness $.del
Glenmar, has re-organi!ed its business model into two separate business units H Specialt* ?usiness under the name of Glenmar, Pharmaceuticals Ltd $GPL% and Generics ?usiness under the head of Glenmar, Generics Limited $GGL%& ?oth GPL and GGL are growing as independent entities with distinct business models where in GPL is mo ing up the alue chain with focus on branded generics and drug disco er* acti ities and GGL is mo ing down the pharmaceutical alue chain with focus on pure generics business and 'cti e Pharmaceutical +ngredient $'P+%& #5ecialt/ "usiness, Glenmark Pharmaceuticals Ltd! (GPL+, Specialt* di ision of Glenmar, ta,es care of its ?randed generics business and new drug disco er*& 3his business focuses on building the brands and generating prescriptions& +t has a long term ision of de elopment and mar,eting of no el drugs& 's a part of strateg* of brand building the compan* intends to impro e the presence of sales and mar,eting front ends in all important geographies& Generics "usiness, Glenmar, Generics Ltd& $GGL%I 8ith a ision of emerging as a leading integrated global generics organi!ation, Glenmar, Generics Limited $GGL% started independent operations during <E09& GGL focuses on de eloping, manufacturing, selling, and distribution of generics products& +t is an end-to-end erticall* integrated generic pla*er with capabilities ranging from 'P+ manufacturing to front end sales in ,e*

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mar,ets& GGL focuses on ,e* niche segments including #ermatolog*, Dormones, Controlled Substances, Oncolog*, and Modified Release Products& GGL has an established presence in "orth 'merica, 6uropean Union $6U% and 'rgentina and maintains mar,eting front-ends in these countries& 3he compan* has a strong base in formulations de elopment with teams operating out of laboratories in +ndia and Latin 'merica& 3he compan* has a state-of-the-art manufacturing plant at Goa, +ndia that is appro ed b* <#' $US%, 3P# $Canada%, MDR' $UJ%& 3he compan*5s US arm H Glenmar, Generics +nc& US' has a portfolio of o er :) generic products in the US mar,et which includes a mi. of oral solids, oral liCuids and semisolids& GGL has established its presence in the UJ generic mar,et and has begun to e.pand to other mar,ets in the 6U region& 3he business model for the 6U business is based on a mi. of out-licensing and Glenmar,5s own sales across these mar,ets with products chosen to reflect niche opportunities or competiti eness through ertical integration& 3he business has a portfolio of solid orals and semi-solids differentiated on the basis of difficult to de elopGformulate products and high entr* barrier products& GGL also de elops, manufactures, mar,ets and distributes acti e pharmaceutical ingredients $'P+s% to other pharmaceutical companies& +t mar,ets around @@ 'P+s globall* in appro.imatel* 70 countries, including the US, 6U, South 'merica and +ndia& GGL has so far filed :9 #M<s $#rug Master <iles% with the US-<#'&

Industr/ O8er8ie9
3he pharmaceutical industr* includes the disco er*, de elopment, manufacturing and distribution of drugs& ' highl* organi!ed sector, the +ndian pharmaceutical industr* has grown from a humble Rs 1,)00 crore turno er in 1970 to appro.imatel* Rs 1,00,@11 crore $US(/0 bn plus% in /009-10 $September /009% growing at about 7 to 9 > annuall*& 3he countr* now ran,s third in terms of olume of production $10> of global share% and 1:th b* alue as per C*gnus report& 3he sector is highl* fragmented with more than /0,000 registered units& +t has e.panded drasticall* in the last two decades& 3he leading /)0 pharmaceutical companies control B0> of the mar,et with mar,et leader holding nearl* B> of the mar,et share& 3he mar,et dominates b* +ndian companies with B)> mar,et share whereas M"C pharma companies ha e onl* /)> mar,et share& ?ut the trend is changing with M"Cs increasing focus towards +ndian mar,ets&

#ect.r O8er8ie9

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3he domestic Pharma formulation mar,et is continues to grow double digits& +n the Cuarter under re iew, the domestic pharmaceutical industr* witnessed a strong growth of 19&:>, as per ORG +MS& 's per industr* estimates, the industr* is e.pected to grow 1B&)>-17&)> in the current fiscal& #espite price control, pla*ers are positi e on Russian mar,et, than,s to strong double digits growth& Contract manufacturing business was sluggish due to global mergers, but is set to impro e in the second half of the current fiscal as most of the global pla*ers are shutting down high cost manufacturing facilities& ?ut contract research is *et to reco er as order inflow from US regions is remains lull as small biotech pla*ers are not completel* reco ered&

Peer C.m5aris.n
3he compan* had wea, <E09 due to macro as well as micro factors which are nonrecurring& +t is belie ed that the compan* has targeted those issues and future of the compan* loo,s good& 3he peer set has been selected based on the business segment the* are present in i&e& Generics and R=#& Since GPL faced one-time compan* specific issue last *ear, so the PG6 cannot be the onl* basis of comparison& GPL5s 6 G6bitda, PG?- multiples are lower than the most of its peer group& RO"8 is lower than peers because its profitabilit* got impacted last *ear due to arious reasons e.plained earlier coupled with the A+? done b* the compan* in Sept509 which increased its capital base thus impacting the ratio& <or <E0B and <E07 the RO"8 for the compan* was as high as :)&/> and :1&@> respecti el*& 3he compan*5s 6?+3#' margins are highest in its peers at /)&7> whereas closet competitor is 3orrent with //&)> margins& +ts P'3 margins are 1/&B> which is third in the list of its stated competitors& ?ut this going to change due to the reduced interest burden the compan* would enFo* 1@&/> margins in <E116 and 1B&7> in <E1/6&

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inancial Anal/sis
Re8enues t. 2r.9 at <1= CAGR .8er %<34<*E Glenmar, Pharmaceuticals has been growing at a C'GR of /B> o er <E0@-10, the compan* has earned US# 11Bmn from "uclear Chemical 6ntit* $"C6% outlicening deals highest b* an* domestic compan*& 3he compan* e.perienced rough <E09 due to economic slowdown and due to failure of outlicensed "C6, Dowe er o er the last few


Cuarters it has been seen that there is a re i al in the financials dri en b* the strong growth across business units& 3he rise in the number of '"#' appro als in the US and e.pected re i al of the other mar,ets would ha e a positi e impact on the base business financials of Glenmar,& 3he management e.pects Glenmar, to record a C'GR of /0-/)> o er the ne.t / *ears, howe er conser ati e estimates sees a C'GR of 1)> o er the ne.t 2 *ears in its base business on bac, of lower base in 6uropean mar,et, fora* in new geographies in semiregulated mar,ets and consistent stead* growth in Latin 'merica and +ndia would be main growth dri ers for specialt* business& <urther, the lower base in US and 'rgentina and growing generics demand across the world would dri e growth in generics space& "alance #heet E>5ected t. stren2then 2.in2 ahead Glenmar, had repaid around Rs 2)0mn as part of the redemption of the <CC? issued in /00) and /00@ in <E10, while it is e.pected that the remaining <CC? issued in /00B to also be redeemed b* the compan* in <E116& <urther, the compan* has alread* raised Rs& :,000mn through issue of A+P at Rs& //1 per share and use the proceeds to reduce the debt& 3hese measures ta,en b* the management indicates the management is focussing on reducing the debt going ahead& Such measures would strengthen the balance sheet of the compan* and would create alue for the shareholders of the compan*& 3he compan* is also in ma,ing concerned efforts to reduce its debtor da*s from the current 121 da*s to 1/0 da*s o er the ne.t *ear& E"ITDA mar2in t. remain sta:le and Net 5r.7it t. 2r.9 at *?= CAGR 6?+3#' is e.pected to grow at 19&/:> C'GR o er <E10-126 to Rs 11&:@bn& 6?+3#' margin would remain stable at 20> o er ne.t / *ears& "et profit is e.pected to grow at //&1)> C'GR o er <E10-126 to Rs @,1@0mn from Rs 2,270 mn& 3he growth is to be dri en b* strong re enue flow, consistent 6?+3#' margin and lower interest cost as the compan* will graduall* reduce its debt o er the period of time&

In8estment Risks
#l.9 D.9n in the Ec.n.m/, 3he performance of the compan* is correlated to growth of econom* also& 'n* slowdown in the econom*, as witnessed last *ear, ma* affect the sector in general including GPL& Dela/ in ANDA A55r.8als, 3he compan*5s abilit* to achie e further sales growth and profitabilit* in US is dependent on its success in continuing to successfull* obtain '"#'

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appro als, challenge patents, de elop non-infringing products relati e to branded pharmaceuticals and obtaining a 170-e.clusi it*& Re2ulat.r/ Issues, 'n* disciplinar* action b* US<#' ta,en against the compan* in case of an* iolation sited b* them, would ad ersel* impact growth prospects of the compan*& ailure .7 R@D $.lecules, +n order to remain competiti e the compan* spends substantial amount on R=# acti ities and loo,ing for out licensing partners& +f the ongoing and increasing R=# in estments pro e unsuccessful, it would result in higher costs without a proportionate increase in the income, which in turn would ad ersel* affect the compan*5s income and financial condition&

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i 2 u r e < , I n c . me # t a t e me n t
in +"R Crores

Source: Company Documents, Student Estimates

(In INR Crores) Revenues COGS EBITD De!re"#$%#o n& 'or%#s$%# on EBIT In%eres% EBT In"o'e T$(es E T )#nor#%* In%eres% +,us%e+ Ne% In"o'e D#v#+en+ Re%$#ne+ e$rn#n-s S.$res Ou%s%$n+#n E/S (#n

FY06 758 605 153

FY07 1222 779 443

FY08 1976 1122 854

FY09 2070 1553 517

FY10 2512 1836 676

FY11E 2889 2022 867

FY12E 3322 2326 997

FY13E 3821 2674 1146









130 18 112 11 101 0 101 5 96

401 40 361 17 344 0 344 5 339

782 71 711 50 661 0 661 18 643

414 146 269 106 163 2 161 10 151

555 164 391 53 338 4 334 11 323

721 168 552 75 478 6 472 11 461

821 194 627 85 542 7 536 11 525

935 222 712 96 616 8 608 11 598

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14 7 18

13 25 65

26 25 30

25 6 80

27 13 10

27 17 47

27 19 84

27 22 54


i 2 u r e * , " al a n c e # h e e t
in +"R Crores

Source: Company Documents, Student Estimates

(In INR Crores) Cash Accounts Receiva !e Inventories "thers Current Assets #ota! Current Assets Invest$ents %ross Fi&e' Assets Accu$u!ate' (e)reciation Net Fi&e' Assets C*I+ Glenmark Pharmaceuticals Limited| 9/3/2010 (e,erre' #a& Assets "ther Assets #ota! Assets Accounts +a-a !e (e t Fun's .inorit- Interest E/uit- Ca)ita! Reserves 0 1ur)!us 1hareho!'er2s

FY06 106 382 158 95 741 19 530 77 453 130 !42 207 1508 380 735 0 44 349 393

FY07 106 566 270 163 1105 18 710 117 593 219 !72 623 2486 863 937 0 24 662 686

FY08 157 807 401 286 1651 18 1124 205 919 338 !95 818 3649 1139 991 1 25 1493 1518

FY09 71 955 630 422 2079 18 1839 273 1566 545 !57 686 4838 1142 2094 3 25 1573 1598

FY10 107 1078 708 527 2421 18 1530 255 1275 698 !71 1114 5455 1228 1869 3 27 2328 2355

FY11E 481 1309 704 472 2967 18 1854 388 1466 614 !82 1282 6265 1412 2034 3 27 2789 2816

FY12E 759 1506 810 543 3618 18 2235 549 1686 706 !94 1372 7306 1624 2338 3 27 3314 3341

FY13E 1068 1732 931 624 4356 18 2682 743 1939 812 !108 1480 8497 1867 2688 3 27 3912 3939


Fun's #ota! 3ia i!ities 1508 2486

l .9 s







i 2 u r e ) , # t a t e me n t . 7 C a s h
in +"R Crores

Source: Company Documents, Student Estimates

(In INR Crores) C$s. F0o1 Fro' O!er$%#n "%#v#%* C$s. F0o1 Fro' Inves%#n "%#v#%* C$s. F0o1 Fro' F#n$n"#n "%#v#%* O!en#nC$s. B$0$n"e C0os#n"$s. B$0$n"e

FY07 288

FY08 328

FY09 !152

FY10 425

FY11E 715

FY12E 739

FY13E 829





























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i 2 u r e ? , # t a t e me n t . 7
in +"R Crores

ree Cash


Source: Company Documents, Student Estimates

(In INR Crores) EBITD De!re"#$%# on EBIT T$( C$s. F0o1 2%er T$( De!re"#$%# on C.$n-e #n 3or4#nC$!#%$0 C$!#%$0 E(!en+#%ur e Free C$s. F0o1
Glenmark Pharmaceuticals Limited| 9/3/2010

FY07 443 42 401 19 382 42 89 18 317

FY08 854 72 782 55 727 72 119 18 662

FY09 517 103 414 164 251 103 207 18 128

FY10 676 121 555 75 480 121 153 18 430

FY11E 867 146 721 97 623 146 !84 18 835

FY12E 997 176 821 111 710 176 92 18 776

FY13E 1146 211 935 126 808 211 106 18 896


i2ure 1, 'e/ Rati.s

Source: Company Documents, Student Estimates

De:t4EDuit/ Rati. L.n2 Term De:t4EDuit/ Rati. Current Rati. i>ed Assets In8ent.r/ Interest C.8er Rati. P"IDT$ (=+ P"IT$ (=+ P"DT$ (=+ CP$ (=+ APAT$ (=+ ROCE (=+ RONE (=+

%<3 0&@1 0&/9 /&:7 2&)@ B&2: /&B7 /&/1 /2&) /1&:2 12&7/ 1:&): 1/&:7 9&1: 7&))

%3A 0&B1 0&/1 1&7) /&2 :&/9 1&B/ 2&@ :1&)@ 29&2) 20&@1 /B&2B /)&1@ 1B&B 19&2

%30 0&9B 0&:B 1&)9 2&21 )&B1 /&B@ 10&77 2)&79 22&7 2/&B9 /9&B9 /B&@9 2/&)7 )/&@2

%3B /&12 1&/B 1&B) /&:) :&@9 /&27 )&2: /B&91 /)&1 /2&/ 17&91 1@&1 1B&:B 2)&71

%3C 1&92 1&): /&7/ /&1: :&9) /&@@ )&79 19&:: 1@&@1 1@&@1 12&B1 10&77 11&@ /2&21

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O9nershi5 and material c.n7licts .7 interest, 3he author$s%, or a member of their household, of this report KholdsGdoes not holdL a financial interest in the securities of this compan*& 3he author$s%, or a member of their household, of this report K,nowsGdoes not ,nowL of the e.istence of an* conflicts of interest that might bias the content or publication of this report& K3he conflict of interest isML Recei5t .7 c.m5ensati.n, Compensation of the author$s% of this report is not based on in estment ban,ing re enue& P.siti.n as a .77icer .r direct.r, 3he author$s%, or a member of their household, does KnotL ser es as an officer, director or ad isor* board member of the subFect compan*& $arket makin2, 3he author$s% does KnotL act as a mar,et ma,er in the subFect compan*5s securities& Ratin2s 2uide, ?an,s rate companies as either a ?UE, DOL# or S6LL& ' ?UE rating is gi en when the securit* is e.pected to deli er absolute returns of 1)> or greater o er the ne.t twel e month period, and recommends that in estors ta,e a position abo e the securit*5s weight in the S=P )00, or an* other rele ant inde.& ' S6LL rating is gi en when the securit* is e.pected to deli er negati e returns o er the ne.t twel e months, while a DOL# rating implies flat returns o er the ne.t twel e months& In8estment Research Challen2e and Gl.:al In8estment Research Challen2e Ackn.9led2ement, KSociety NameL +n estment Research Challenge as part of the C<' +nstitute Global +n estment Research Challenge is based on the +n estment Research Challenge originall* de eloped b* the "ew Eor, Societ* of Securit* 'nal*sts& Disclaimer, 3he information set forth herein has been obtained or deri ed from sources generall* a ailable to the public and belie ed b* the author$s% to be reliable, but the author$s% does not ma,e an* representation or warrant*, or implied, as to its accurac* or completeness& 3he information is not intended to be used as the basis of an* in estment decisions b* an* person or entit*& 3his information does not constitute in estment ad ice, nor is it an offer or a solicitation of an offer to bu* or sell an* securit*& 3his report should not be considered to be a recommendation b* an* indi idual affiliated with KSociety NameL, C<' +nstitute or the Global +n estment Research Challenge with regard to this compan*5s stoc,&

Glenmark Pharmaceuticals Limited| 9/3/2010