Buy Glenmark Pharmaceuticals Ltd For Target Rs.528 - HDFC Securities
Glenmark has outpaced IPM (Indian Pharmaceuticals Market) with the launch of differentiated products and successful brand building efforts. Company is ranked no.2 in Dermatology, 4th in Respiratory and 6th in Cardiac. Its nine brands appear in Top-300 and one in Top50 in the Indian Pharma Market. In April 2019, Glenmark became the first company globally to launch the novel patent-protected and globally researched SGLT2 inhibitor remogliflozin for Type 2 diabetes. In 2015, the company had launched an affordable version of teneligliptin for Type 2 diabetes. Going forward, company intends to keep scouting for ways to make drugs more accessible and affordable in the domestic market.
Company has built upon a strong portfolio in OTC segment as well with few key products such as Candid dusting powder and Scalpe. Domestic sales for Sep-20 rose 34 percent, led by Covid anti-viral drug Fabiflu. Also, other brands such as Telma, Candid, and Candid B supported growth. For the Sep-2020 quarter, the company registered strong 32% growth led by robust numbers from anti-viral drug sales and strong traction from cardiac and anti-diabetic therapeutic areas.
Glenmark is the 14th largest generics manufacturer by prescription volume in the US. However, in the recent years, company’s performance in the US market has remained weak on the back of competitive environment and price erosion. Also its Baddi facility continues to be under US FDA scanner since May 2019 where it had received a warning letter with key issues. Company guides for better growth in the next two years for US business vs. 5% decline in the last three years. Glenmark has approval for 164 products in the US while 44 applications pending in various stages of approval with US FDA, of which 24 are Para IV filings.
LatAm and Europe business has been growing at steady pace. On the back of lower base and new launches LatAm could see better growth in the coming quarters. Company has been one of the highest spenders on R&D; it has spent ~Rs 4800cr or ~12% of its revenues over FY17-20. Management has guided for lower R&D as compared to last three years and commercialization of Monroe facility would drive margins over the next two years; we have factored in 160bps margin expansion over FY20-22E. API business is expected to do well on the back of better utilisation and due to tighter pollution control norms in China over the next two years. Company derives > 75% of API revenues Internationally from Europe, US and Japan etc. The re-rating of the stock depends upon the company’s achievement in containing R&D spend and reduction in debt. Currently, the combination of financial risk and business risk (NCE development) is suppressing valuation multiples.
Valuations and View:
Though domestic business has been fairly strong in India, the US has not really picked up pace despite a low base due to price erosion in large products. The US base business looks fairly set, we believe that there will be slow pick-up due to a relatively thin pipeline (44 pending approvals) and warning letter at its Baddi facility. Glenmark has also transferred its high-margin API business to a newly formed subsidiary and has also initiated the transfer of its innovative business to a new entity with a view to raise capital to fund R&D expenses and support its commercial strategy post approval. Till the time the new entity (ICHNOS) finds a partner, Glenmark will have to bear the costs. Further deleveraging through business reorganization hinges on asset monetization, which is a time-consuming exercise. High R&D costs and capex leave limited scope for debt repayment.
Meaningful debt reduction can be achieved if the company is able to generate cash flows through some corporate action and from any large out-licensing deals. Going forward, consistent rationalization of R&D cost and debt reduction on the back of minority stake sale of its NCE (New chemical entity) business- ICHNOS Sciences & API business - Glenmark Life sciences will be key monitorables. We estimate 7% revenue and 15% PAT CAGR over FY20-22E. We project India business to grow at 9%, US revenues at 7% and Europe business at 8.5% CAGR over the same period. Healthy revenues along with 160bps margin improvement would lead to 15% PAT CAGR over FY20-22E. Though Glenmark is trading at a discount to peers, limited growth drivers in the near term and a highly leveraged balance sheet limit upside potential. Any meaningful debt reduction and value unlocking in the innovative business could lead to stock rerating. Glenmark spends the highest percent of EBITDA on innovation research among its peers but on EV/EBITDA it is trading at a significant discount to peers due to the high debt on books.
At the CMP, Glenmark trades at 13.3x FY22E Earnings. We feel investors can buy the stock on declines to Rs 436-440 band (12x FY22E EPS) and add further on dips to Rs 399-403 (11x FY22E EPS) for base case target price of Rs 474 (13.0x FY22E EPS) and bull case TP of Rs 528 (14.5x FY22E EPS) over the next two quarters.
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