Recommendation : Buy CMP : Rs 733 Target : NA Upside Potential : NA Sector : Pharmaceuticals Sensex : 23084 Bloomberg code : GNP. IN Reuters Code : GLEN.NS AT A GLANCE 52 Week High Low :1262.90/704.10 Mkt. Cap (Rs. in Crs) :20721 Major Shareholders Promoters (%) :46.45% Free Float (%) :53.55% Strong Domestic Growth: The company has a strong presence in derma, cardiac and respiratory segments which have helped the company post higher than industry growth in the last five years. The growth also has been aided significantly by new product addition in the region which is also higher than the industry average indicating that the company can further consolidate its position in the Indian industry. New launches to drive growth: Glenmark has highlighted two FTFs where it has the sole exclusivity of which Azelaic Acid launch is dependent on court verdict expected in Mar 2016. The other launch is that of Ezetimibe for treatment of high cholesterol; the branded drug Zetia of Schering Plough (now Merck) had 9m CY14 sales of ~US$2bn. Russia- Recovery in sight: Russia accounts for ~50% of the ROW, ~9% of Glenmark’s total revenues and ~18% of consolidated PAT; its PAT margin of 19% is above the adjusted average for the company. Outlook & Valuation We Initiate coverage of Glenmark Pharmaceuticals with a Buy rating. Given the growing pharma market, Increasing presence in value added segments, New product launches are the positives for the stock. We expect Glenmark Pharmaceuticals to report an EPS of INR 49.10 in FY18E. At the CMP of INR.733, the stock trades at 14.93x EPS of FY17E. Key Risks to our recommendation include slower product approvals, Increasing competition, and adverse forex movements which will impact the company as company exports its products. Year Net Sales* Operating Profit Pre-tax Profit* Net Profit* OPM Margin PBT Margin PAT Margin PE (X) 2013 5,012.34 1,009.99 733.72 623 20.15 14.64 12.43 32.96 2014 6,005.20 1,090.77 696.86 545.6 18.16 11.60 9.09 37.67 2015 6,629.75 1,022.51 594.27 475.24 15.42 8.96 7.17 43.26 (Rs. Cr) Glenmark Pharmaceuticals Ltd 26-02-2016 Multibagger Report Background: Glenmark Pharmaceuticals Ltd operates in formulations space with exposure in USA, India, AACIS (Africa, Asia and Commonwealth Independent States), LATAM (Latin America) and Europe regions. The company also markets APIs to regulated and semi-regulated markets. The therapies Glenmark focuses on are dermatology, anti-infectives, respiratory, cardiac, diabetes, gynaecology, CNS and oncology. Glenmark has been active in novel molecule development segment for NBE (New Biological Entities) and NCE (New Chemical Entities), of which 7 are under active development.
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Recommendation : Buy
CMP : Rs 733
Target : NA
Upside Potential : NA
Sector : Pharmaceuticals
Sensex : 23084
Bloomberg code : GNP. IN
Reuters Code : GLEN.NS
AT A GLANCE
52 Week High Low :1262.90/704.10
Mkt. Cap (Rs. in Crs) :20721
Major Shareholders
Promoters (%) :46.45%
Free Float (%) :53.55%
Strong Domestic Growth:
The company has a strong presence in derma, cardiac and respiratory segments which have helped the company post higher than industry growth in the last five years. The growth also has been aided significantly by new product addition in the region which is also higher than the industry average indicating that the company can further consolidate its position in the Indian industry. New launches to drive growth:
Glenmark has highlighted two FTFs where it has the sole exclusivity of which Azelaic Acid launch is dependent on court verdict expected in Mar 2016. The other launch is that of Ezetimibe for treatment of high cholesterol; the branded drug Zetia of Schering Plough (now Merck) had 9m CY14 sales of ~US$2bn. Russia- Recovery in sight:
Russia accounts for ~50% of the ROW, ~9% of Glenmark’s total revenues and ~18% of consolidated PAT; its PAT margin of 19% is above the adjusted average for the company.
Outlook & Valuation
We Initiate coverage of Glenmark Pharmaceuticals with a Buy
rating. Given the growing pharma market, Increasing presence in
value added segments, New product launches are the positives
for the stock. We expect Glenmark Pharmaceuticals to report an
EPS of INR 49.10 in FY18E. At the CMP of INR.733, the stock
trades at 14.93x EPS of FY17E. Key Risks to our
recommendation include slower product approvals, Increasing
competition, and adverse forex movements which will impact the
Background: Glenmark Pharmaceuticals Ltd operates in formulations space with exposure in USA, India, AACIS (Africa, Asia and Commonwealth Independent States), LATAM (Latin America) and Europe regions. The company also markets APIs to regulated and semi-regulated markets. The therapies Glenmark focuses on are dermatology, anti-infectives, respiratory, cardiac, diabetes, gynaecology, CNS and oncology. Glenmark has been active in novel molecule development segment for NBE (New Biological Entities) and NCE (New Chemical Entities), of which 7 are under active development.
Investment Arguments
Company Background:
Glenmark Pharmaceuticals Ltd operates in formulations space with exposure in USA, India, AACIS (Africa, Asia and Commonwealth Independent States), LATAM (Latin America) and Europe regions. The company also markets APIs to regulated and semi-regulated markets. The therapies Glenmark focuses on are dermatology, anti-infectives, respiratory, cardiac, diabetes, gynaecology, CNS and oncology. Glenmark has been active in novel molecule development segment for NBE (New Biological Entities) and NCE (New Chemical Entities), of which 7 are under active development. The formulations business has six manufacturing facilities, four in India and two overseas; and the facility at Baddi, Himachal Pradesh, India is approved by Medicines and Healthcare Products Regulatory (MHRA) and United States Food and Drug Administration (USFDA) for semi-solids. The overseas facilities are situated in Brazil and the Czech Republic. The API operations are from 4 facilities across India and six R&D centers.
Revenue Contribution (%)
Strong Domestic Growth
The company has a strong presence in derma, cardiac and respiratory segments which have helped the company post higher than industry growth in the last five years. The growth also has been aided significantly by new product addition in the region which is also higher than the industry average indicating that the company can further consolidate its position in the Indian industry. The company launched Sitagliptin but had to stop after loss in litigation, which it has replaced with Tenaligliptin which is also a similar Dipeptidyl Peptidase-4 (DPP-4) inhibitor for anti-diabetic and can plug the hole to an extent. The company has presence in complex injectables and oncology in other geograhies which provides other untapped therapeutics for the company in India.
Russain market – Poised for Recovery
Russia accounts for ~50% of the ROW, ~9% of Glenmark’s total revenues and ~18% of consolidated PAT; its PAT margin of 19% is above the adjusted average for the company. In Q3 FY15, company had deliberately held off supplies and would do so to an extent in Q4 on the back of dramatic Rouble depreciation. Company has not taken any price increase so far in its Russian portfolio and is unlikely to do so in Q4FY16 as this would have a direct impact on the ongoing strong volume growth. Respiratory and dermatology continue to be the key growth drivers of the Russian business. Restricted supplies also mean lower future bad debts even as Russian receivables typically stretch out to five months irrespective of any currency volatility. Russian revenues are expected to be boosted by Seretide (known as Advair in US) MDI inhaler launch, which is the first generic inhaler in that market. After the currency devaluation, Seretide market has been pegged at US$35mn from US$65-70mn earlier and we expect Russian revenues to gain traction from the inhaler launch. Apart from Seretide, Glenmark mentioned it has also received three large approvals with about revenue potential of ~Rs1bn/product after 2 years of launch which would drive the upsurge in FY16/17 revenues.
US – Revival on Cards
Glenmark’s US revenues have been impacted in the current fiscal on lack of approvals as well
as channel consolidation; company had expected 12 approvals in FY15 and has obtained only
four so far. Going ahead we expect key launches like gTarka (anti hypertensive), likely to be a
limited competition product) and Desmopressin to help regain momentum in FY16. In Q3 FY15,
company received final approval for Omeprazole for treatment of GERD, arising from excess
stomach acids which has picked up business and would be a decent sized opportunity.
Company remains optimistic on at least 2-3 approvals in Q4 of next fiscal. In US, Glenmark would focus on niche and high entry barriers segments like Immunosuppressants and Complex injectables supported by respective manufacturing capabilities in Indore. Company is also focused on moving away from commodity generics and tweaked its product mix in current fiscal which would drive better margins.
Upcoming launches to drive growth
Glenmark has highlighted two FTFs where it has the sole exclusivity of which Azelaic Acid launch is dependent on court verdict expected in Mar 2016. The other launch is that of Ezetimibe for treatment of high cholesterol; the branded drug Zetia of Schering Plough (now Merck) had 9m CY14 sales of ~US$2bn and Glenmark has settled with the innovator under which it can sell the generic version by December 2016 about four months before its patent expiry in April 2017. Glenmark would share the profits with Par Pharma which has bought the exclusive rights to sell gZetia in US. Welchol is the other key near term launch wherein Glenmark has settled with Daiichi and Genzyme and it can launch generic Colesevelam Hydrochloride (Welchol).Based on Daiichi’s latest results, Welchol (both oral and suspension) had sales of US$329mn for 9m FY15. In terms of ANDA pipeline, Glenmark has about 74 pending approvals of which 39 are para IV filings translating in to pending approvals/total filings ratio of 0.44x which is the upper end of industry range (largely in line with Lupin and ahead of Sun, Dr Reddys’ and Torrent Pharma). This indicates sufficiently large headroom for future product approvals which in turn augurs well for US growth.
Latin America – Brazil approvals key growth driver
Latin America is expected to contribute 7.7% to Glenmark’s revenues of which Brazil accounts for 55% share with the rest divided between Mexico, Venezuela and Caribbean subsidiaries. In Q4 FY14, Glenmark launched the generic Seretide in Mexico which combined with general shortages has probably driven the robust growth seen since then on yoy basis. Brazil market has been characterized by lack of approvals which is a common thread running across other domestic peers like Cadila. Indeed since Q2 FY14, Glenmark has received/launched only 4 products/approvals in the Brazil market resulting in moderate 10-12% yoy quarterly growth in local currency. The company has expressed confidence that even 3-4 approvals would be enough to drive robust growth in Brazil supported by a unique respiratory launch in FY17. Currency has been other key determinant of INR growth though underlying growth in Lat Am is strong enough to withstand 10- 15% depreciation in the next fiscal. With lower contribution from US and muted ROW growth, Europe share of revenues is likely to increase to 10.6% in FY16 from 9.5% in previous year with UK, the largest subsidiary, posting robust growth.
Out-Licensing for Own Molecules
Glenmark has consistently followed strategy of developing and out licensing own molecules to
larger MNC pharma companies; the move is understandable given the fact that phase III clinical
trials require large upfront investment which even if the balance sheet supports, would be
difficult to justify on a single novel molecule on risk adjusted basis. Over the past 10 years,
company has undertaken seven out licensing deals with cumulative US$217mn received in
upfront and milestone payments. In the ongoing R&D efforts, it has out licensed a Multiple
Sclerosis mAB to Sanofi who is conducting phase II studies.
Robust R&D Pipeline
Glenmark’s R&D pipeline appears robust with a portfolio of 3 NCEs and 4 NBEs either in clinical trials or about to enter one including in‐ licensed molecule Crofelemer. Focus areas across the
R&D spectrum remain inflammation, pain and oncology. Company has filed for Crofelemer in about 14 key markets out of the 140 countries where it has exclusive marketing rights. Based on our understanding, we believe Crofelemer in its current approval for treatment of non infectious Diarrhea in HIV/AIDS patients would not be a meaningful driver of growth. However, Crofelemer for treatment of acute Diarrhea in adults would provide a strong impetus to revenues. Amongst the other clinical candidates, GRC 17356, for treatment of neuropathic pain, has shown much promise in phase IIa and phase IIb studies have been initiated. Glenmark plans to open an IND in Q2 FY16 and is on the lookout for an out licensing partner. Given the large size of pain market globally of ~US$2bn with >40mn patients, we believe the GRC 17356 can garner meaningful out licensing payments. Another key candidate is first in class monoclonal antibody (mAB) targeting Multiple Sclerosis out licensed to Sanofi. Phase II studies are currently being conducted by Sanofi while the market size is pegged at US$3bn with 1.5mn patients globally with ~50% in US.
Global Pharma Market Pharmaceuticals market plays a vital role in an economy as well as ensuring welfare of the citizens. The global pharma market stood at US$ 980 bn in 2013 (as per Statista 2014) and has grown at ~8% CAGR over 2001-13. US is the largest pharma market at ~US$392 bn or ~40% contribution followed by Europe (EU countries) at ~US$ 265 bn or ~27% contribution and Japan at ~US$115 or 11.7% contribution. The Indian Pharma Market (IPM) stood at US$ 13.0 bn or at a mere 1.3% contribution to the global pharma market. Though the IPM is ranked 12th globally in value terms, it is the third largest in volume terms (due to lower pricing of drugs).
Indian pharmaceuticals Overview The pharmaceutical market for India constitutes domestic (IPM - Indian Pharma Market) and exports markets. The IPM which stood at US$13.0bn in 2013, has witnessed a steady CAGR ~11% over 2000-2013 driven by improving affordability, better health awareness, higher penetration of healthcare facilities and worsening lifestyles. The Indian pharma exports kick started when companies entered the global markets way back in 1990's (post India's adoption of liberal economic policies). Pharma exports from India posted a CAGR of 25% over 1990-2013 and stood at ~Rs 900 bn or US$ 14.7bn in 2013. Today every 3rd pill in the world is manufactured in India. As per Pharmexcil (Pharmaceuticals Export Promotion Council of India), both the domestic as well exports are expected to grow at >16% CAGR from US$ 14.7/13.0bn to US$41/45bn over 2013-2020.
The IPM is largely a branded generic market wherein drugs are sold by brand names, unlike in US and other developed markets, where drugs are sold by generic (chemical) name. The Indian market comprises of over 5000 pharma companies, 22,000 stockist/distributors and over 600,000 retailers (chemist shops). IPM has witnessed a steady CAGR 11% over 2000-2013 driven by improving affordability, better health awareness, higher penetration of healthcare facilities. IPM – Skewed towards Acute Therapies
The Indian market is largely an acute therapy market with ~70% contribution from that segment. Acute drugs are those medications which are prescribed by doctors for only 3-6 weeks. Large global markets comparatively are more chornic in nature with ~60% contribution. Chronic drugs are medications which are taken for a longer period, for e.g. medication for diabetes, blood pressure, oncology and cholesterol. From the company's perspective, better share in chronic therapies lead to higher growth.
IPM-CompetitiveDynamics
The Indian pharma market is very fragmented with top 10 players contributing ~40% the market and top 25 companies accounting for ~70% of the market. The largest player as of 2014 is Abbott with 6.03% market share. The IPM in 1970's was dominated by MNC's with hardly few Indian companies in top 25. However, when the Indian Patent Act changed from product patent to process patent, Indian companies emerged by manufacturing copycat drugs. By early 2000, there were about 20 Indian companies in top 25. In 2005, the Patent Act re-established product patent, a patent law that was in line with the WTO mandate. Post the product patent implementation no Indian companies could launch new (patented) products and MNC's entered the Indian markets once again with their patented molecules/ drugs. Moreover, after Abbott-Piramal and Ranbaxy-Daiichi takeover, top 3 out of top 5 companies in IPM were MNC's. By 2015 (assuming Sun-Ranbaxy merger is completed) Sun will become the largest player in the market with ~8.5% market share and top 4 out of top 5 companies will be of Indian origin.
IPM-Growth Drivers
Improving per capita spend India's spend on drugs is amongst the lowest compared to top 15 pharma markets. The per capita spend has been around US$60-64 pa (between 2010 and 2014) as per World Bank. As the per capita income continues to grow (10.4% in FY13-14) led by good economic growth, disposable incomes are likely to go up and the per capita spend on drugs is set to increase.
Changing Disease Profile Though the IPM is currently an acute market, the shift towards chronic has been swift. With changing lifestyles the occurrence of chronic ailments has increased over the years. The chronic segment contributed ~23% in 2005 at ~US$ 1.15bn. Whereas as of 2013 the chronic market stood at US$ 3.9bn contributing ~30% to the IPM, a CAGR of 16.5%. The chronic segment is expected to register 16-18% growth compared to single digit growth in the acute segment over the coming years. The core focus of companies over the years has been to enhance the chronic product basket as well increase penetration through recruiting field force. The most chronic focused companies in the IPM include, Torrent Pharma, Sun, Lupin and Unichem all of whom have more than 60% contribution from chronic.
