Hold Glenmark Pharmaceuticals Ltd For Target Rs.760 - Sushil Finance
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Focus on selective therapies on domestic front
Glenmark Pharmaceuticals Ltd (Glenmark) has strengthened its position in its core therapies like cardiac, diabetes and respiratory. Domestic sales continue to outperform the Indian pharma market on account of traction on Fabiflu and chronic therapies like cardiac and diabetes. We expect domestic performance to be healthy, thereby leading to better gross margins on account of a better product mix.
Debt and non core R&D expense to witness reduction
Glenmark Life Sciences, a subsidiary of Glenmark Pharma, has filed DRHP for IPO and it plans to raise ~Rs.1160 cr. We expect part of the proceeds will be used to pare down the debt. Also, the company has spent Rs.757cr in FY21 for its R&D on its Ichnos Sciences (R&D division). Ichnos is in discussion for fund raising both at the company and molecule levels. It expects at least one outlicensing deal in FY22 and therefore R&D spends, net off licensing fees will be lower, leading to better margins.
US business to pick up on account of new launches
Over the last 4 years, US business saw a de-growth of 1.4% in FY18-21, driven by price erosion in derma products (5-6%). It managed to file just 7 ANDAs in FY21, on account of Covid-19. The company has indicated that price erosion has hit the bottom and plans to file ~18-20 ANDAs in FY22 and launch 8-10 products, with a focus on limited competition products. We expect 8% CAGR for US revenue over FY21-23e.
OUTLOOK & VALUATION
With limited success in R&D in the past, resulting in inflating debt and spends, Glenmark has taken a strategic step to diversify its R&D division, thereby focusing on generics and specialty products. This should result in lower interest and R&D spends.
We expect strong positioning in the domestic market, arrest of de-growth in the US market and gradual opening up in Europe and Rest of World tailwinds to play out, resulting in 8-9% growth in topline for FY22 and FY23. We had initiated coverage with a BUY rating for a target price of Rs.760 over an investment horizon of 18-24 months on 04th June 2021; with an increase in market price, we are changing the recommendation to Hold.
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